David Cameron has asked the government to reconsider the state pension reforms put forward in a green paper from the Department for Work and Pensions in April 2011.
The paper proposed introducing a flat-rate state pension of £140 a week and linking the state pension age to life expectancy.
Under these state pension reforms, higher earners would be prevented from making extra contributions to boost their pension pots. People who have already retired will not benefit from the proposed changes.
In a bid to stave off a backlash from the Conservative core of ‘grey voters’, Cameron has called for a review of the plans, which are due for publication in Autumn. He may also be keen to avoid a repeat of the ‘granny tax’ row which arose during last year’s Budget.
After the DWP published its green paper, this March’s Budget saw Chancellor George Osborne pledge further details on the flat rate pension in Spring 2012.
In June this year, Cameron said there would be a ‘straightforward flat rate of £140 a week’ and that it would be ‘quite simply doing the right thing by those who have done the right thing all their lives’.
Changes to Government white paper
A white paper due in July was postponed until this autumn. It’s expected that the white paper will now no longer centre around the radical flat-rate £140 state pension, but may instead set out some alternative options.
One of these could be ‘Option 1’ put forward by the DWP in its green paper – moving the second state pension to a flat rate by 2020. This would mean that contracting out would continue for members of defined benefit schemes, whereas under the £140 a week flat rate proposal contracting out would be abolished.
For more on contracting out, see our guide Contracting out of state second pension.
Impact on public sector workers
It’s not just the ‘grey voters’ that Cameron has to worry about. The abolition of contracting out for defined benefit schemes would mean that public sector workers have to pay an extra 1.4% into their pension pots because they will no longer receive the contracting out rebate.
Pensions Minister Steve Webb rebutted accusations that public sector workers would be negatively affected by this reform. He said in July this year that the extra 1.4% would be balanced out by the extra National Insurance contributions they would receive.
Business as usual
The DWP has denied any potential changes to the state pension reforms. A DWP spokesperson said: ‘We have not watered down the plans to introduce a flat rate state pension. There is no set date for the paper but we will publish it by the end of the year.’