The Government has confirmed plans to radically reform the basic state pension through the introduction of a universal, flat-rate payment of £140 for future pensioners.
A much anticipated green paper, titled ’A state pension for the 21st century’, proposes two options for reform.
Option 1 would be an acceleration of existing reforms so that the second state pension moves to a flat-rate by 2020. Under this option contracting out would continue for members of defined benefit schemes.
Option 2, the “more radical” reform option, proposes moving to a single-tier, flat-rate state pension of around £140 a week at today’s prices. This would replace the current system, which combines the basic state pension with payments from Serps and the state second pension. It would also bring an end to means-testing for pensions.
There would be a minimum of seven years of contributions or credits to qualify for the single-tier pension and to qualify for the full amount individuals would have to build up 30 years of NI contributions or credits, as is the case already.
Periods spent contracted out will be taken into account so individuals that have contracted out will receive less than the £140 directly from the state pension. The DWP estimates around half of pensioners would have such an offset by 2050.
Under both options the system will remain contributory and all contributions made under the current regime will be honoured. The Department for Work and Pensions says the reform will not involve an increase in spending on state pensions.
Pensions minister Steve Webb says: “The current state pension is dogged by complexity and confusion, it makes it very difficult to save for retirement and leaves millions of people relying on means tested support. I am proud to bring forward proposals that will end the unfairness inherent in the system and secure a fair, decent and simple state pension fit for the 21st century. These reforms will transform pension saving in this country.”
Work and Pensions Secretary Iain Duncan Smith says: “Over the years small changes to the state pension system have turned what started as a relatively simple contributory system into a complex mess, leaving people utterly confused as to what the state pension means for them. We have to send out a clear message across both the welfare and pension system: you will be better off in work than on benefits and you will be better off in retirement if you save.”
The DWP also confirms plans to link future rises in the state pension age to longevity. This could be done through the introduction of a formula or a regular review of changes in life expectancy.