State pension reform

The government has set out plans to reform the state pension by 2017 introducing a single state pension payment for all workers, including people who have taken career breaks and the self-employed.

The plan is to introduce a simple flat rate pension set above the means test (currently £142.70) and based on 35 years of National Insurance contributions (NICs) and will hugely benefit women, low earners and the self-employed, who under existing rules find it almost impossible to earn a full state pension. This compares with a current basic state pension of £107 per week. The new system will become operational in 2017.

There are currently 11.5m people claiming the state pension. Of those, 2.8m women receive a state pension of under £80 a week due to incomplete contributions.

Minister for pensions Steve Webb said: ‘The current state pension system is too complicated and leaves millions of people needing means-tested top-ups. We can do better. Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save.’

Joanne Segars, NAPF chief executive, said: ‘People like their pensions simple. This will set a clearer, fairer state pension that offers an easily-understood foundation on which they can plan their retirement. A flat rate system also dovetails with the recent auto-enrolment reforms by helping workers see what they need to save in their new workplace pension.’

The abolition of the contracting out NI rebate will impose a £6bn new tax burden on workers and companies.

Brian Strutton, GMB national secretary for public services, said: ‘The new flat rate state pension should be fairer than the complicated basic plus additional pension set up it is intended to replace but the detail will need to be scrutinised carefully.

‘There is a very serious consequence arising from the ending of contracting out and that is the increase in National Insurance contributions that employers and employees in defined benefit pension schemes will have to pay. For employers, that is 3.4% of the NI ranking earnings and for the 6m employees affected it will be an extra 1.4%.’

The reforms will also result in changes to the way final salary pension schemes are managed. ‘These are complicated reforms that will mean big changes in the way many company pensions are run. We are glad that the government recognises that challenge and is supportive of the need to manage the transition carefully,’ added Segars.