Yesterday, Pensions Minister Steve Webb announced that the Government will introduce a simple, single, decent state pension.
I say simple, but the explanation of why it is an improvement on the current system and how we get from where we are now to a single pension is anything but simple. I will do my best but you may wish to read yesterday’s exchanges in the House of Commons where Steve showed an impressive mastery of this complex subject.
At the moment, we have two state pensions. The first is the basic state pension, which is based on your National Insurance contributions history (you get the full amount if you have contributed for 30 years or more). The second is the earnings related state pension, often referred to as SERPS, which is incredibly complex and from which you can ‘contract out’ if you are part of a workplace pension scheme. It is so complex that it is very difficult to predict what you will get when you retire - the Minister read out the following extract from a standard DWP letter that beautifully illustrates the point:
“At some time you chose to ‘contract out’ of the additional state pension by paying into an Occupational or Personal Pension. Because of this we make a contracted-out deduction (COD) from the maximum amount of additional state pension we would otherwise pay you. We makes changes every year to the additional state pension and the COD, but this may be at different rates. This means that your additional state pension could be different from the amount we have estimated and could actually be reduced to nil”.
The two pensions are uprated according to different rules, there are complex arrangements for people who are divorced or become widowed and there are also special arrangements for married women based on the rather anachronistic assumption that men need a pension whereas women simply need a husband.
To make matters worse, many pensioners don't receive enough from the two pensions to live on, so they rely on a third system of mass means testing known as the pension credit introduced by Gordon Brown. There are two problems with this.
First, it means that for many people it makes no sense to save for their retirement - unless you manage to save a lot, then your savings mean you get less pension credit and you find yourself no better off than the person next door who didn’t bother to save a penny.
Second, many pensioners don’t claim the money they are entitled to.
If you’ve got this far, hopefully you agree that this mess needs sorting out.
What the Government wants to do is to go back to William Beveridge’s original vision of a single, decent state pension linked to National Insurance contributions but updated to reflect demographic and societal changes since his time:
- people are living longer - in the 1940s, only a minority of men survived to 65; today, the Office of National Statistics projects that over a third of the babies born this year will live to see their 100th birthday;
- more women work - in 1948, only four in ten women were in paid employment;
- divorce is sadly more common - in 1948, 11 per cent of marriages ended in divorce; today it is about 50 per cent; and
- the labour market has become more diverse, with over a third of those in employment either self-employed or in part-time work.
In future (the Government hopes to introduce the new system in 2017), you will be entitled to a single state pension set above the level of the means test (currently £142.70 per week) subject to your National Insurance contributions history (you get the full amount if you have contributed for 35 years or more, which is 5 years more than the current basic state pension to reflect the fact that we will all be working longer; you have to have contributed for 7-10 years to qualify at all - the Government believes that those who come to this country and work for just a couple of years shouldn’t get a UK pension). The fact that the state pension will be above the level of the means test means that if you do the right thing and put money aside for your retirement when you are working you should be better off than someone who doesn’t save. Put simply, it will pay to save just as the Government is also trying to make sure it always pays to work.
There will be credits for those who cannot pay National Insurance because of caring responsibilities.
Each individual will qualify for a pension in their own right, with no complex rules about claiming pensions based on the National Insurance contributions of a spouse.
The complex system of ‘contracting out’ will be abolished - if you have ‘contracted out’ you will pay full National Insurance contributions just like everyone else.
Existing entitlements will, however, be recognised. If you retire in 2018 and your contributions would have entitled you to a combined pension of £160 then that’s what you will get.
What about people already receiving their state pension? You may be reading this and thinking “They’re looking after future pensioners but what about us?” Well, first of all, the Government has done a lot to look after current pensioners. We’ve introduced the triple lock so that the pension goes up in line with prices, earnings or 2.5 per cent, whichever is higher - there’ll be no miserly 75p increase under this Government. And we’ve protected universal pensioner benefits as we promised. Second, we are not throwing any extra money at future pensioners - the proposed single pension is higher than the current basic pension because in the long-term people will not be entitled to large state earnings-related pensions and because some people (those who have opted out of SERPS) will no longer pay less National Insurance. The change will benefit those who do badly out of the current system – women and the self-employed.
At the moment, more than 10 million people aren’t saving enough for their retirement. A simple, single, decent state pension coupled with the right to a workplace pension with a statutory minimum contribution from your employer will put that right.