Last month the Government released a White Paper setting out plans to reform the state pension system in the UK. The plans have been broadly welcomed by the industry and welfare groups, who expect that the ‘Single Tier’ pension will simplify pensions regulation.
Where are we now?
There are 11.5 million of us in the UK claiming the state pension a creaking system complicated by means-testing and a multitude of add-ons.
The current basic state pension comes in at £107 per week, but not everyone is entitled to it. Full payment depends on your having paid, or been credited with, a certain amount of National Insurance Contributions.
Women, low earners and the self-employed often find it hard to earn a full state pension, and Government figures show that some 3.2 million individuals (2.6 million households) – receive Pension Credit to supplement their retirement income.
With an aging population, the Government is very concerned that the state pension system will become too great a burden for future generations. It predicts that without changes, the spending on state pensions and pensioner benefits would rise from 6.9% of GDP in 2012/13 to 8.5% in 2060/61.
Single Tier pension
According to the Government, the Single Tier reforms will slow this increase down to only 8.1% of GDP in 2060, ensuring that the state pension will continue to be sustainable.
The new system will include some key reforms:
- A single, flat rate state pension payment set above the basic level of the means test (currently £142.70). The White Paper assumes a £144 a week start rate, which will be up-rated annually.
- An end to different Basic and Additional State Pensions, and contracting out of defined benefit pension schemes. Savings credit will be abolished.
- Thirty-five qualifying years will be required to receive the full amount, with over 80% of new pensioners achieving this by the 2040s.
- A minimum number of qualifying years (up to 10 years) to get any single tier.
- Self-employed people will be brought fully into the state pension for the first time.
- All state pension rights accrued under the old system will be recognised, so nobody will lose out on any pension they have earned.
The Government expects that the reforms will take effect no earlier than April 2017.
If you’re thinking about retiring or planning for your future it’s important that you keep up to date with the changes regarding pensions in the UK. Quite often there are people who visit their financial adviser when it’s almost too late – people who reach their 40s, 50s or even 60s and wonder what to do about their pension when they retire. The lesson is that it’s always best to sound financial advice sooner rather than later.
Having said that, even those who are prudent with their finances and planning for their future can find the current pension regulations in the UK to be complex. One of the main arguments in favour of this new legislation is certainty for the future.
The reaction of pension experts and charities for the elderly has been broadly favourable, as it appears to be generally felt that the increased certainty brought by the reforms will enable people to plan and save more effectively for their retirement.
According to Callum Chomczuk, spokesman for Age Scotland, while the reforms are welcome, it is disappointing that the proposals will not benefit existing pensioners.