White Paper on single tier pension brings 'much needed simplification'

Following consultation launched in April 2011, the Government has built upon the 'single tier' option for state pension reform after it was preferred by around three quarters of the organisations which responded.

Related topics:  Retirement
Amy Loddington
15th January 2013
Retirement
Option one, ‘faster flat rating’ would accelerate changes already under way to deliver a
flat-rate two-tier pension, whereas option two, ‘single tier’, represented a bolder reform to introduce a flat-rate pension set above the basic level of means-tested support.

The White Paper released yesterday by the Government outlined their plans to introduce legislation to reform the state pension at the earliest opportunity, subject to the Parliamentary timetable. The Government intends to implement the single-tier pension in April 2017 at the earliest.

The single-tier reforms will restructure current expenditure on the state pension into a simple flat-rate amount, to provide clarity and confidence to better support saving for retirement. Those already over State Pension age when the reforms are implemented will continue to receive their state pension (and the Savings Credit, where applicable) in line with existing rules.

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. For illustrative purposes, this document assumes uprating of the single-tier pension by the triple lock, in line with coalition policy
for uprating the basic State 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- replace the State Second Pension, contracting out and outdated additions, such as the Category D pension and the Age Addition.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 or credits for the full amount. There will also be a minimum qualifying period of between seven and ten qualifying years (modelled as ten throughout this document). 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 implementation of the single-tier pension will significantly simplify the pension system, helping people to understand what they will get from the State when they retire. By the mid-2030s, over 80 per cent of people will receive the full weekly amount of single-tier pension, narrowing the range of pension outcomes in comparison to the current system and improving certainty. The proportion of people reaching State Pension age after the implementation of single tier who qualify for Pension Credit will be halved compared to the current system, and remains under 10 per cent through to 2060. The single-tier pension will also help to address gender inequality in the system, bringing forward by over a decade the point at which men and women achieve equal state pension outcomes.

Single-tier reforms will modernise the state pension system by reflecting the society in which we live today: the large majority of individuals will build up a sufficient National Insurance record to become entitled to the full single-tier amount in their own right, instead of relying on their spouse’s or civil partner’s contributions. In an increasingly flexible labour market, the National Insurance contributions of the self-employed will be treated in the same way as employee contributions for state pension purposes.

Neil Carberry, CBI Director of Employment and Skills Policy, said:

"The current state pension is confusing and complex. Big rises in life expectancy and long-term pressure on public finances mean we must get more people saving for old age. These reforms will give real clarity and certainty about how much retirement income people will get from the state and how much they need to save privately through auto-enrolment schemes. It is right that the changes will protect state pension entitlements built up before the reforms kick in.

"Businesses have been concerned about the financial impact of abolishing the National Insurance rebate for contracting out defined benefit schemes. They will be pleased that the Government has put a plan in place to deal with this. The rebate is in place to recoup the National Insurance owed to employers by the state for paying the Second State Pension on its behalf.  The changes will only be acceptable if employers with defined benefit schemes are not left worse off."

Vince Smith-Hughes, retirement income expert at Prudential, said:

"The flat-rate State Pension reform will be the biggest overhaul of the system for decades and is a very valuable step forward.

"Private pension savers need funds of up to £130,000 to match the flat-rate State Pension but they now know that any savings will benefit them and will not affect benefits.

"The new system improves the safety net for pensioners in the UK but should only ever be regarded as part of an overall retirement plan and the real income shock for many will come when the gap between their current earnings and the State Pension becomes apparent.

"Maintaining your standard of living in retirement means saving as much as possible as early as possible and joining a company pension scheme where feasible."

The planned legislation also includes increasing the State Pension age to 66 for men and women by 2020 and raising it to 67 between 2026 and 2028.

Andrew Tully, pensions technical director, MGM Advantage said:

"The introduction of a flat-rate state pension brings much needed simplification to a very complex area of pensions. For too long we have grappled with a complex and difficult to communicate system which sometimes punished those who saved.  Now the Government has proposed a system which removes ambiguity leaving it clear for individuals to plan for their financial future with confidence."

However, many will view the state pension as a base income which they would like to build on. MGM Advantage has calculated1 how much you would need to save to effectively double your state pension, taking into consideration investment returns, inflation, rising state pension age, and index-linking of the flat-rate £144 a week state pension.

"For the many people who would like more than £144 per week income in retirement, these figures illustrate that it's crucial to start saving as early as possible.   These amounts can seem daunting but that shouldn't deter people from starting to take control of their retirement income."

Richard Parkin, Head of DC and Workplace Savings Proposition at Fidelity Worldwide Investment says:


"We are pleased that the Government has finally committed to roll out the flat rate pension from 2017. It will not only restore simplicity as it marks the end of the convoluted means tested state pension system but will more importantly provide pension savers with the clarity they desperately need to make informed decisions about their retirement.

"Whilst the Universal State Pension will make planning for the future a lot easier, it is important to note that it will mean a lower State pension for many Britons in the long run. It is therefore crucial that people sit down and work out how much they need on top of the flat rate state pension to achieve a comfortable retirement."
More like this
Latest from Property Reporter
Latest from Protection Reporter
CLOSE
Subscribe
to our newsletter

Join a community of over 30,000 intermediaries and keep up-to-date with industry news and upcoming events via our newsletter.