View the article online at http://citywire.co.uk/money/article/a873860
Flat rate state pension will cause new political storm
The furore over women's state pension age increases will be nothing compared to grievances new flat-rate state pension will cause.
The state pension has become a battleground and this week pensions minister Ros Altmann will find herself more directly in the firing line than ever before when she gives evidence on state pension age rises and the incoming flat-rate state pension, to the work and pensions committee of MPs.
One campaigning voice in particular has become extremely loud, that of the Women Against State Pension Inequality (Waspi) whose cries of injustice regarding steep increases in women’s state pension age (SPA) have won them a chance to have the issue formally debated in parliament.
But aside from the bluster, what are the real injustices in the state pension system? In truth, the new state pension will face its own charges of being unduly harsh to women.
Women born in the 1950s are campaigning for compensation for the loss of their right to a pension at 60 due to the equalisation of men’s and women’s pension ages in the 1995 Pensions Act, which they say the Department for Work and Pensions (DWP) failed to tell them about in good time.
On 7 January, in a backbench debate sponsored by the Scottish National Party’s Mhairi Black, MPs voted unanimously that the two-year acceleration of men’s and women’s pension age equalisation imposed in the 2011 Pensions Act was unfair to some women born in the 1950s. Black argued it in fact worsened historic gender inequality.
But this will be nothing compared to what is to come.
In April 2016, the new state pension comes into force, and there are already complaints of unfairness.
Under the new state pension, anyone with less than 10 years’ national insurance (NI) contributions will not qualify for a pension at all. This will affect people who have become UK residents late in life, and people who have spent long periods in prison. It will also affect women who were housewives for most of their adult life but did not qualify for NI credits, together with some older women who paid the reduced ‘married woman’s stamp’.
Since the new state pension also ends the right for married women (or men) to claim their spouse’s pension after his (or her) death, a few of these women could end up with no state pension at all, though they may be able to claim means-tested pension credit.
Deferring the state pension and/or making voluntary NI contributions are solutions, but for women on low incomes who are close to retirement age it may be too late.
Significantly more women will be affected by the rise in the number of years needed to qualify for a full state pension, from 30 to 35.
However, prior to 2007 the qualifying period was 44 years for men and 39 years for women. The new qualifying period is thus more generous than pre-2007 arrangements. The change is, however, discriminatory against women, since more women than men are likely to make insufficient contributions to qualify for the full state pension. I expect battles from women’s organisations over this.
Then there is the contracting-out problem. The new state pension was advertised as being a flat-rate pension for everyone. But for anyone who contracted out of the state earnings related pension scheme (Serps), their entitlement to the new state pension will be reduced by the contracted out amount just as it would have been under the existing system.
Admittedly, they can top up their state pensions – perhaps by drawing on their corporate pensions, as former pensions minister Steve Webb (pictured above) has suggested. But there is already considerable anger about the fact that the government advertised the new state pension as a universal flat-rate scheme when it is nothing of the kind.
There are also growing complaints over the transitional arrangements for the new state pension. It imposes a sharp cliff edge for people who qualify for the full state pension and retire on or before 5 April 2016. A man born 5 April 1951 will receive the current full state pension of £115.95 per week (£119.95 from April 2016). If he is born one day later, on 6 April 1951, he will receive the new full state pension of £155.65. An equivalent cliff edge applies to women born in April 1953.
Though for anyone who qualifies for the earnings-related state second pension, this cliff edge would be much less severe.
Deferring the state pension does not solve this problem. People dependent on the state pension can claim pension credit, which tops it up to £151.20 per week, but this is heavily means tested: those with corporate or private pensions, savings over £10,000, and those still working after state pension age, may not qualify.
There are calls for people close to retirement to be allowed to choose whether to retire on the new or the old state pension.
By far the biggest storm on the horizon arises from the fact the new state pension gives a large pension increase to new retirees while leaving existing pensioners dependent on means-tested benefits.
Will they take their exclusion from the new state pension lying down? I doubt it.
Frances Coppola (pictured) spent many years working for banks and now writes and speaks about banking, finance and economics
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