State pension: £140 flat-rate moves nearer? Government to abolish means-tested pension credit

08 March 2011

The government has confirmed plans to increase the state pension and abolish means-tested pension benefit. The change means an automatic increase for many pensioners and removes a disincentive to saving.   

Pensions overhaul proceeds

The Work and Pensions Secretary, Iain Duncan-Smith, today pledged to 'fundamentally simplify' the state pension system by removing means testing for those who currently qualify for pension credit.

The existing rules mean that those who qualify, by having made sufficient national insurance contributions for at least 30 years, get a full state pension of £97.65 and then receive a means-tested additional sum to bring their total pension up to £132.60.

The new flat-rate scheme proposed by the government will abolish pension credit and pay a universal state pension to all who qualify. The indications are that this will be set at £140 in today's money, although Mr Duncan-Smith stopped short of giving a figure. More detail may be revealed by the Chancellor, George Osborne in the 2011 Budget later this month. As well as saving administrative costs, the new scheme will remove a disincentive for those who might qualify for pension credit to save. It will also end a long-running pensions shortfall, where a large number of those entitled to the top-up benefit failed to claim it. 

Explaining the drawbacks of the current system, Mr Duncan-Smith said: 'The state pension system is so complex that most people have no idea what it will mean for them now and in their retirement. And too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing. We have to change this.' 

Details still unclear

The proposed change was welcomed by Age UK, whose director Michelle Mitchell said: 'By developing a system that lays out clearly what people can expect, the Government will reduce fear for those approaching retirement.'. Pensions Campaigner, Dr Ros Altman, of Saga, also welcomed the move to a flat-rate scheme, declaring, 'This would be the best news for pensions in years.' 

There are still some answered questions about the new pension, however. The most serious concerns the position of those who are in line to receive additional state pension (S2P). This is currently linked to how much you earn and how much national insurance you pay. The move to a flat-rate pension could mean those who have built up S2P (or its forerunner SERPS) could receive less than they are expecting, although transitional arrangements may reduce the impact of this.

Another problem is the status of those already in receipt of state pension. Will they remain at current levels, while younger people receive more? The indications are that this is the case. Those who fail to qualify for full state pension because they have not paid enough national insurance could also miss out on the increase, although the number of years needed has recently fallen to 30 for both men and women.

Other pension changes

The new state pension will not be introduced immediately. It is expected to be 2014 before it replaces the current system. At the same time, the government has embarked on a private pensions initiative, where all workers will be auto-enrolled into a workplace scheme. Those whose employer has no scheme to offer will be able to save in the newly established National Employment Savings Trust (NEST).

State pension levels were reconnected with earnings last year and from 2012 will be automatically increased in line with wages, prices as measured by the Consumer Prices Index (CPI) or by 2.5%.

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