Consolidation of benefits helps solve pensions crisis, claim experts, with most women and low earners deemed better off
A radical reform of the state pension has been unveiled, under which women, the self-employed and low earners will have their weekly income from the public purse in retirement boosted in a new flat-rate payment worth £144 in today’s money.
The plan to consolidate a plethora of different state pensions and tax credits into the new single rate will be paid for by higher-income earners.
However, by the time today’s schoolchildren retire, more than half will be worse off than they would be on today’s schemes. The plan is also likely to trigger a tussle between public services and the Treasury because the new system will bar public sector workers from opting out of part of their state pension contributions in return for a lower state pension – a system which currently delivers a national insurance rebate from the chancellor to schools, hospitals and other employers worth more than £6bn a year.
The plans – detailed in a white paper announced to parliament by the pensions minister, Steve Webb – were widely welcomed by pensions experts, who said they would encourage more people to save for retirement and boost the success of the government’s recent introduction of auto-enrolment for company pension schemes, under which employees now have to opt out rather than choose to opt in.
Currently the complexity of the system, lack of clarity over how much people will get from the state, and the risk of the state pension being reduced by means-testing are all blamed for deterring half of the workforce from paying into their company pension schemes to top up their income when they retire.
“The message is now very simple: if you want more than £7,500 a year to live on in retirement, you need to start saving,” said Tom McPhail, head of pensions research for investment advisers Hargreaves Lansdown. “With millions of employees set to join their company pension in the months ahead, today’s announcement delivers the foundation for a solution to the pensions crisis.”
Under the new plans everybody who for more than 10 years pays national insurance or gains credits for being registered as caring for children or a relative or claiming benefits, will be eligible for a state pension, and the amount will rise to the full weekly flat-rate payment after 35 years’ work or credits.
Webb said the change will not come into force before 2017, to allow company pension managers time to prepare for the change, and the final date will be set by the chancellor of the day.
From that date, people who have retired on higher pensions than the flat rate will continue to be paid at that higher rate, but millions of people who are currently paid less would have their payments increased to the equivalent of an estimated £144 a week, though the exact figure will also be set by the government at that time.
Public sector workers who have opted out of the state pension will be allowed to accrue more credits from 2017 until they retire and will be paid more than the basic £107 a week in line with those extra payments until they save enough to qualify for the £144 weekly rate.
The coalition has already moved to raise the state pension retirement age from 60 for women and 65 for men to 66 for all workers in 2020, rising to 67 in 2028, with further increases due to be considered once in each five-year parliament.
The Department for Work and Pensions said the changes would be cost-neutral. To fund it, the DWP estimates that if the reform was introduced in 2017, more than 15% of retirees would gain by more than £2 a week and another 5% or so by less than £2 a week, while the vast majority would be no worse off. Less than 10% – the higher earners – would lose out.
The winners include women who previously lost out by taking time out to look after children or other relatives or because they were dependent on their partners’ earnings, and the self-employed, who often failed to qualify for a full state pension.
The reform would “stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family”, said the work and pensions secretary, Iain Duncan Smith.
A full impact analysis is due to be published alongside a bill later this week. However, the white paper suggests that the percentages of “winners” will fluctuate to a peak of more than 60% by 2030, with that number then dropping over the following generation to about 40% in 2060, when more than half of retiring workers would be worse off.