Government sets out approach to new 'single tier' state pension

Out-Law News | 15 Jan 2013 | 10:27 am | 2 min. read

The Government has set out its plan for a new flat-rate state pension, expected to replace the current system from April 2017.

Pensions Minister Steve Webb said that the changes, set out in a White Paper (108-page / 3.8MB PDF), would particularly benefit women, low earners and the self-employed. Pension credits, means testing and the second state pension will be abolished for new pensioners when the new rate comes into force.

"The current state pension system is too complicated and leaves millions of people needing means-tested top-ups," Webb said. "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."

The proposals will create a flat-rate pension set above the means test and based on 35 years of National Insurance contributions (NICs). The Government assumes a starting rate of £144 per week, guaranteed by its 'triple lock', compared to the current basic state pension of £107 per week. The triple lock is a Government guarantee to uprate the basic state pension annually by the highest of 2.5% or the increase in earnings or prices.

The Government will also carry out a review of the state pension age (SPA) every five years to ensure the system is sustainable, based on analysis of life expectancy projections and a report from an independently-led body on other relevant factors, it said. The first review will take place in the next Parliament. The SPA for women in the UK is due to rise from 60 to 65 to match that of men from 2018, before it increases to 66 for both sexes in October 2020 and to 67 by 2028.

Pensions law expert Carolyn Saunders of Pinsent Masons said that the changes were "long overdue".

"Although there will be complexities in the short term as changes are introduced, it is essential for individuals to understand what level of pension the state will provide," she said. "Without that, individuals will be disinclined to take responsibility for their pensions in retirement and we will not achieve the member engagement that is so key to the security of the UK's future pensioners."

Under the current system, in order to qualify for the full basic state pension individuals must have attained 30 'qualifying years' during which they have either paid NICs or received credits in lieu of NICs because they were claiming certain benefits. Those who have fewer than 30 years receive less than the full rate. According to figures from the Department of Work and Pensions (DWP), 11.5 million people currently claim the state pension while 3.2m of those have to apply for pension credit to supplement their retirement income.

Among women claiming the state pension, 2.8m receive less than £80 a week as they do not have the necessary number of qualifying years. This compares to only 474,000 men on the lowest rate. Pensions Secretary Iain Duncan-Smith said that the reforms would prevent women who had taken time out to care for children or family members from being "let down by the system". 750,000 women who reach SPA in the decade after the reforms are introduced will get an extra £9 a week on average than they would have under the current system, according to the DWP.

However, the full rate of new pension will only be available to those who have completed a 35 year-qualification period, up from the previous 30 years. In addition, people will have to have completed a minimum 10-year service period to qualify for any pension at all.

Years spent working, claiming benefits for being unemployed, looking after children aged 12 or under or caring for sick or disabled adults will count towards the qualification period. The DWP has estimated that 80% of people reaching SPA by the 2040s will receive the full weekly amount, including those self-employed people who are prevented from getting a full state pension under the current system.