Save, make, understand money


Govt confirms simplified flat-rate state pension

Jenna Towler
Written By:
Jenna Towler

Pensions minister Steve Webb has confirmed the details of the coalition’s overhaul of the basic state pension.

Speaking in Parliament this afternoon, he confirmed the weekly payment would stand at £144, plus inflation increases between now and 6 April 2017.

The current full state pension is £107.45 per week, but this can rise to £142.70 with top ups from pension credit and the state second pension.

The new flat-rate state pension will mean people will work longer to get full benefits – workers will have to contribute 35 years’ worth of National Insurance (NI) contributions, rather than 30.

Anyone who has not paid NI contributions for the past eight or ten years will not qualify for the enhanced state pension at all. The exact number of years is still to be finalised.

Contracting out will be abolished, and the overhaul will merge the state second pension with the basic state pension.

Webb told MPs: “In a world where everyone will be auto-enrolled init to workplace pension schemes it longer makes sense for the state to run its own earnings related pension scheme.”

He added there would be a state pension age review every five years, starting in the next parliament.

“State pension age, I can confirm there will be no further changes announced during the life of this parliament,” the minister said.

Current pensioners, and workers who retire before the cut-off date, will continue to receive their pensions under the current system.

Niki Cleal, director of policy unit Pensions Policy Institute, said: “The existing state pension system is very complex.

“Currently individuals can qualify for a basic state pension of up to £107.45 a week but they may also be eligible for additional payments that can top-their state pension income up to £142.70 if they qualify for the means-tested pension credit, or could be eligible for up to a further £160 of state second pension, if they have a full National Insurance contribution record and have opted to remain in the state second pension system.

“Under the new single-tier system anyone with more than 35 years of National Insurance contributions will receive £144 a week from the state pension, which is expected be increased in the future in line with prices, earnings or 2.5%, whichever is higher.

“Some individuals will benefit from the government’s new single-tier pension proposals but other individuals may lose out in the future depending on their personal circumstances.

“The self-employed will all receive more from the state pension in the future and many women or carers who will retire after 2017 and have taken time out of work are likely to benefit from the new single-tier system.

“Those who lose out are likely to be consistently higher earners who would have built up considerable rights to the state second pension.”

Documents posted on the Department for Work and Pensions website said the single-tier pension will:

• be set above the basic level of means-tested support (the pension credit standard minimum guarantee, currently £142.70 per week for a single pensioner). The current legislative requirement to increase the basic state pension at least in line with average growth in earnings will also apply to the single-tier pension.

• replace the state second pension, contracting out and outdated additions, such as the category D pension and the age addition. The savings credit element of pension credit will also close to pensioners reaching state pension age after the implementation of the single tier pension;

• require 35 qualifying years of National Insurance contributions (NICs) or credits for the full  amount. There will also be a minimum qualifying period of between seven and ten qualifying years). Those with fewer than 35 qualifying years but above the minimum qualifying period will receive a proportionally smaller single tier amount;

• be based on individual qualification, without the facility to inherit or derive rights to the state  pension from a spouse or civil partner; and

• continue to allow people to defer claiming their state pension and receive a higher
weekly state pension in return. The deferral rate will be finalised closer to the planned
implementation date. It will no longer be possible to receive deferred state pension as a lump-sum payment

The document also said additional transitional arrangements will protect the position of those who have pre-implementation NICs.

Under the single-tier pension three of the most complex elements of the current system will end.

These are:

• the two-tier system of basic state pension and state second pension, including the option to contract out of the state second pension;

• the savings credit element of pension credit; and

• the ability to derive, inherit, or share a pension based on National Insurance contributions of a spouse or civil partner.