The Department for Work and Pensions (DWP) has issued a statement on the proposed simplification of the state pension.
As confirmed in the 2012 Budget in March, the government will introduce a flat-rate, single-tier state pension, currently estimated at around £140 a week.
It will replace the current state pension, which is made up of the basic state pension and various additional state pension entitlements.
According to the latest DWP administrative data, the level of basic and additional state pension payouts can vary so much in the current system, from around £7 a week to £230 a week. Around 130,000 people get £7 or less a week and the same number of people receive £230 or more a week.
Steve Webb, pensions minister, said: “The range of state pension payouts at the moment is simply staggering.
“The current system is so complex and would baffle even Einstein. Worse, if people have no idea what they will get, they can’t make sure they have enough savings for their retirement.
“We can’t go on playing roulette with pensions. A flat-rate, single-tier state pension will restore simplicity and give people certainty instead of chance. And it will provide a sure foundation for further saving.”
A white paper will set out further details later this year.
Read more articles on the changes to the state pension
This is probably the warm-up act before the government unveils plans to move towards a flat-rate state pension of a little over £140 a week for all.
The government is right to point out the current system is horrendously complicated. Consequently, building any accurate idea of what you might get from the state is nigh on impossible.
By moving to a simple £140 a week the government can provide everyone with greater certainty over what they will get from the state, allowing them to properly plan what they need from their private retirement savings.
From 1 October 2012, millions of people will be automatically enrolled into a workplace pension. If the government fails to publish its plans for the state pension by then, this long-awaited reform could be thwarted by negative publicity, because under the current system lower income workers could end up simply replacing means-tested state benefits with the savings they make.
Once the plan is announced, we can expect skirmishes on the way to a flat-rate state pension, as some people stand to lose out as a result of this reform. Middle and high earners would do better under the current system than a flat £140 a week. Public sector workers are also likely to be unhappy, as they will be paying an extra 1.4% in national insurance.
It isn’t clear whether the DWP’s decision to publish these figures this week are a prelude to the publication of the white paper, or a nudge to Downing Street to get it signed off.
We are all excited about the concept of a new simple state pension sweeping away the present convoluted and confusing arrangements which, as the pensions minister has so graphically put it, have the capacity to baffle even an Einstein.
It will, if successful, not only make the state pension more understandable, but will also, for many more people, provide a platform for private pension saving, something which could be of crucial importance as the now imminent programme of auto-enrolment starts to roll out.
While simplification is the (laudable) name of the game, as ever however, the devil may well be in the detail. The reform is unlikely, initially anyway, to make a dramatic difference to the range of pension rates that DWP has indicated currently vary from as little as £7 a week to as much as £230 a week.
This is because, on the basis of previous statements, there will still be an NI contribution test. This means that some contributors may fall well short of the 30-year qualifying requirement and thus be entitled to only a proportion of the full-rate pension.
DWP has also confirmed that those people with accrued rights under the present system, which gives them an entitlement to a pension higher than £140 a week, will continue to receive it in full. So it is difficult to see, in the early years at least, that there will be much difference, as DWP seems to imply, in the range and scope of state pension awards made after the changeover date in 2015 or 2016.
It will be good to have sight of the white paper now promised for the Autumn, when hopefully all the details of the plans will be laid fully bare.
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