The government has set-out details of a new single-tier state pension expected to be worth around £140 a week in a bid to reform a state pension system ‘dogged by complexity’.
Pensions minister Steve Webb said on 4 April that scrapping means-tested pension credit for people on low incomes and raising the level of the state pension would ‘secure a fair, decent and simple state pension fit for the 21st century.’
Creating a single state pension rate, to replace the current basic rate supplemented by pension credit for those on a low income, would put an end to inequalities that penalise women, low earners and the self-employed, the government said. Creating a single-tier state pension is also part of wider pension reform the governent is carrying out, partly to encourage more people to save towards their retirement.
The state second pension could also be scrapped under the plans, outlined in a green paper, which will end the process of contracting out. Contracting out is where people opt out of the state second pension with some national insurance contributions rebated to be put towards a workplace pension or on the basis that a certain level of pension benefit will be supplied.
Policy director of the Tax Incentivised Savings Association, Malcolm Small, said: “Bold action is needed now on state pension reform and this paper has the potential to deliver it, providing a decent, affordable, basic state pension as a right for most future pensioners.”
Small said he favoured an option that combined the state second pension, pension credit and basic state pension to create a single-tier state pension.
“People are crying out for simplicity and clarity in the state pension system. The sooner we can deliver it, the clearer and more urgent the incentive will be for the UK population to save more for its own future,” he added.
The government said that currently just under half of pensioners are eligible for means-tested pension credit to top up their state pension but around 1.6 million pensioners don’t claim, leaving them with a basic income of below the £132.60 guaranteed credit a week.
The reliance on means testing to establish whether people receive pension credit means it is hard to be sure whether you will benefit from savings put aside, as this may affect eligibility for pension credit.
Having a single state pension rate would guarantee a minimum amount for people eligible for the state pension.
The Association of British Insurers said: “The proposals to create a flat-rate pension are an important move towards a simpler and more understandable pension system. It will help people plan better for their retirement, stop people falling into the means-testing trap and ensure that it always pays to save. We look forward to working with the government and other stakeholders to make these proposals work.”
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