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Morning Line: a higher state pension is fairer for all

Plans to raise the state retirement pension to a flat rate of £140 should result in a much fairer and simpler system. But there is more the government could do.

 
Morning Line: a higher state pension is fairer for all

Plans to raise the state retirement pension to a flat rate of £140 should result in a much fairer and simpler system. But there is more the government could do. 

Fairer to men and women

Both men and women will face a simple residency test and the pension will no longer be based on the number of national insurance (NI) contributions paid under plans being considered by the government. These are radical changes and a breath of fresh air – but do they go far enough?

Under the current system, a single person with a full contribution record receives £97.65 a week and a couple £156.15, with millions claiming means tested pension credit on top. The proposed reforms would raise the basic state pension to £140 a week for both men and women and will be detailed in a green paper by the end of the year and mean a single person could receive £7,280 a year and a couple £14,560.

This is much fairer to women who have stayed at home to look after children or elderly relatives and don’t have a full NI contribution record. This big increase in pension will be paid for by sweeping away the massive bureaucracy that goes with processing claims for means-tested benefits which will save an estimated £6 billion a year. The increase in the pension age to 66 for all by 2020 will also save billions. The proposals, which are being worked on by Conservative work and pensions secretary Iain Duncan Smith and Liberal Democrat pensions minister Steve Webb, are likely to be applied before the 2020 age increase.

Nest egg

But the most important effect of such a change would be to make saving in the new National Employment Savings Trust (Nest) due to take effect from 2012, worthwhile for all. Without these pension reforms, lower earners would be better off opting out of Nest as they would otherwise simply be paying for Nest benefits that they would otherwise receive for free through means-tested pension top-ups.

A spokesperson for the Department for Work and Pensions spokeswoman confirmed that details of the pension changes are being worked on. ‘We will be bringing forward proposals for reform in a green paper later this year. Our aim will be a simple, decent state pension for future pensioners, which is easy to understand, efficient to deliver and affordable.’

Making saving worthwhile

Reform will make it worthwhile for everyone to save – regardless of whether it is through Nest, ISAs (individual savings accounts), or occupational and personal pension schemes. Under the present system people are penalised for saving because it often simply makes them ineligible for free means tested benefits. The new higher pension would of course be taxable.

The new flat rate pension would see every pensioner receive £140 a week – £40 more than the current basic state pension of £97.65 a week and the complex pension credit and the earnings-related second tier pension would all be swept away. Pension credit was introduced to guarantee the poorest pensioners at least £132.60 a week by topping up the basic state pension. The earnings-related second state pension is paid to anyone who is in work and earning more than the national insurance (NI) lower earnings limit of £5,044 a year.

Get rid of NI next

These are the most radical reforms the state pension has seen since its inception. Now what we want is an admission that national insurance contributions are nothing more than taxation by another name and see the whole system of NI swept away. Billions are wasted every year because thousands of civil servants are pointlessly (and frequently incorrectly) recording NI contributions. 

They are wasting their time and taxpayers’ money because up until now, if a person did not have enough NI contributions to qualify for a full state pension (or any of the other contributory benefits such as sickness benefit and jobseekers allowance) they were switched to means-tested benefit – which are often worth more. Hopefully employees' NI contributions will be combined with tax when the government moves to merge tax with benefits – a long overdue reform – and introduces the ‘universal benefit’ under a much simplified social security system.

What the coalition should also consider is making Nest contributions compulsory so that everyone pays for the benefits they receive and the feckless can no longer opt out of saving, safe in the knowledge that responsible taxpayers will fund their retirement. 

41 comments so far. Why not have your say?

P Everton

Oct 25, 2010 at 11:53

I would query your belief that people don't save because it would make them ineligible for benefits they would get for nothing in retirement.

This is too complicated and far-sighted to be the usual reason for the poorly paid not to have a retirement plan; much more likely is that they just don't earn enough to save.

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Ian Phillips

Oct 25, 2010 at 12:32

So that'll be a free pension for anybody who moves to this country when they're 65?..............brilliant! obviously thought up by a now redundant Labour Quango

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Daniel Barnard

Oct 25, 2010 at 12:36

Lorna, I liked the article and thought valid routes for reform (cutting red tape in particular) were highlighted.

As a slight negative, should such 'journalistic' reports include so much personal opinion and conjecture...

Whilst removing bureaucracy, for example scrapping NI will, I dare say lead to thousands of job losses if it means that the country is in a meaner leaner state for business thereafter then it is surely for the greater good.

There will be winners and losers as always but their has to be money in the pot before it can be shared out

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Mike the red

Oct 25, 2010 at 12:41

Without having any detail it is difficult to speculate, however, I know my second pension/SERPS/Graduated pension will give me total well in excess of the proposal, so it looks like yet again I have been mugged. Role on the revolution (as if!)

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Stephen Ellis

Oct 25, 2010 at 12:42

It would be a minor miracle if the Government could simplify things as is being suggested. However, I would argue that the proposals remove the need for NEST, which would be a fantastic achievement. Nobody in the pensions industry wants NEST. We already have ways in which people may invest should they wish to have a better lifestyle in retirement. I could write a book about the pitfalls of NEST.

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William Dickinson

Oct 25, 2010 at 12:46

Just how "simple" could the residency test be if we are to avoid the "free pension for everyone who moves to this country when they're 65" ?

For example say I just turned 65 and arrived from an EU country and took up residence in the UK ... would I get a free pension ? How about Non-EU arrivals ?

Clearly some form of "qualifying years" of UK residence (and therefore payment of UK taxes) should be part of the test.

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derek farman

Oct 25, 2010 at 12:46

the idea is fine provided the people concerned have lived here for say at least 20 years . Otherwise it will make this country even more attractive for immigrants . Surely a pension has to be earned by working and paying taxes for such a period .

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john

Oct 25, 2010 at 13:14

About time , I always thought thats why we all paid National Insurance ?

Means testing was yet another of Gordon Browns stealth taxes on the middle classes.

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Peter Bulloch

Oct 25, 2010 at 13:18

I, like Mike the red, am not clear on whether the proposal is to solely increase

the basic pension from £ 97.65 to £ 140.00 and leave the Pre 1997 additional Pension and Graduated Benefit unchanged, or will all three be swept away

and be replaced with only £ 140 per week? Currently I receive £ 118.36 from the latter two which brings the total up to £ 216.01 p.w. Having contributed

for 50 years it would be highly unfair to have this cut back by £ 76 p.w. if that is indeed what is proposed.

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William Dickinson

Oct 25, 2010 at 13:34

Hopefully all these issues will be dealt with in a fair way as the Green Paper runs the gauntlet toward legislation.

One methodology might be simply top-up the £140 per week with any SERPS related pension and drop all of the means-tested nonsense which is just a QUANGO by another name. For this to work the legislation whould need to stop the SERPS scheme from accepting new payments so that the SERPS top-up become less and less of a burden to taxpayers over time.

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Jonathan

Oct 25, 2010 at 13:37

My work pension bases the payout on something called "section pay". This is calculated by: salary - (1.5 * basic state pension). So it doesn't seem to matter to my total pension what the state pension is as my pension is calculated to be after 40 years 2/3 final salary this includes the state pension.

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Anonymous 1 needed this 'off the record'

Oct 25, 2010 at 13:51

Does this really mean that a working woman who has paid £hundreds of thousands in personal NIC over the years, in addition to an even greater amount through employers NIC, (quite apart from having contributed millions in corporation tax and through employing others who have also paid NIC as well as income tax) is later (ie after having paid) being told that her contributions were for the Government to pay those who did not bother to work or were simply allowed to immigrate into to this country to be kept and looked after ? Surely this is not within the supposed moral of "fairness" which this Government/Coalition had portrayed ?

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William Dickinson

Oct 25, 2010 at 14:05

Anonymous 1 - NIC is just another name for TAX although under current rules you need to have made NIC payments for a number of "qualifying years" to be eligible for a full state pension. There are means tested benefits on top of this – the whole thing is very complex and costly to administer.

SERPS is the only contribution you make that is directly related to what you get back from your state pension.

Personally I think a flat rate pension of £140 per week for everyone who has lived in the UK for 20 years prior to reaching retirement age is a good plan. It is simple and should be easy to administer. It will cut out government costs of trying to administer means tested benefits.

The only fly in the ointment I can see is guys like Peter who have paid heavily into SERPS ... they should not be penalized for being prudent savers and should get 100% of whatever they are getting from SERPS at the moment under the new plans. The new scheme should simply stop new payments into SERPS which will cause the burden on the taxpayer to diminish over time as unfortunately the money the government takes in SERPS contributions is not set to one side for payments back to the contributor ... the money just goes into the big pot known as the treasury where all the NIC and TAX money also goes.

A friend of mine has an “odd” final salary pension that takes into account any money she gets from the state pension so, like Jonathan, it really does not matter what the state pension is because whatever it is will be subtracted from her private pension payments.

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Jonathan

Oct 25, 2010 at 14:16

I they don't get the money as pension they would get it as income support. I think this move is actually trying to encourage people on lower incomes to save for a pension as it reduces the amount they will need to save to catch up with people who get income support onto ot their pension.

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Anonymous 2 needed this 'off the record'

Oct 25, 2010 at 14:16

Lorna Bourke went off subject by the time she reached the last paragraph. It is most unlikely that National Insurance will be scrapped and irrelevant when considering these important new pension proposals. Instead of this rather silly speculation she should have tried to find answers to the many obvious questions about the new pension plans.

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Hotrod

Oct 25, 2010 at 15:31

It sounds like a very good idea to me. Oviously there will be some who will lose out, but that could be mitigated to some extent by adjusting the tax threshold.

As regards the residency test, perhaps they could adopt a sliding scale whereby someone who has only 1 years residency when they reach state pension age would receive a graduated pension starting at full pension minus 20% and increasing by 1% per year until 20 years of residency. e.g. someone living in UK for 10 years would recieve £140 - £14 = £126

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Christopher Matthews

Oct 25, 2010 at 15:35

Whilst agreeing with many of the comments above, no one has touched on the potential problem if NI and Income Tax are combined. As a pensioner I do not pay NI, but tax at 20%. If they are combined(not a bad idea), would I be taxed on my pension at 32%? Pehaps pensioners should pay a reduced rate of tax when starting to draw there pension.

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StanInCyprus

Oct 25, 2010 at 16:17

Lorna states "Both men and women will face a simple residency test"

What in life is simple?

What happens to a 'UK citizen' who has paid all the required contributions to qualify for a FULL State Pension under current regulations BUT through working or retiring abroad, or both, has had limited years of actual 'UK residence'?

Can Lorna expand on her 'simple' statement about the 'simple residency test"!

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patricia allen

Oct 25, 2010 at 16:31

At the moment there are too many ifs and buts. Once again, an ill thought out scheme on the part of the condem government. They should have all the answers in place before announcing things. On the face of it, a good scheme, but we need to know the details.

What happens to people already drawing serps with their pensions?

What happens to people who have contributed to serps and not yet drawing their pensions?

What happens about ex-pats?

I'll bet readers will think of far more questions to be answered than I have.

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Pat

Oct 25, 2010 at 16:32

Peter Bullock made a very valid point - what happen to the SERPS, etc. that were so dutifully contributed over the years

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John robert

Oct 25, 2010 at 16:52

Sounds great, You get the same pension regardless of the amount you pay in.

Of coures it is fair... I am a politician and what I say is fair is fair.

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Ronald Bentley

Oct 25, 2010 at 16:59

Retired, on full state pension plus SERPS - what happens to SERPS now? Can someone give me an answer? P-l-e-a-s-e.

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Graham Barlow

Oct 25, 2010 at 17:04

I have heard everything now. Who in Hell's name is suppossed to pay for this? It will cost future working generation Billions in taxes to meet it. It will discourage Pension Saving ,and then the populace will be back for more on the grounds that the cost of living and wages have gone up. The next thing will be that the state pension will be "Means tested and you will be disqualified if your private pension/ income is over so much. You mark my words that is exactly what will happen. Every body saving for a private pension keep a very close eye on this one, if you over provide you could disqualify yourself.

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Hotrod

Oct 25, 2010 at 17:13

To Stan in Cyprus.

The answer to your question is simple. 1 years contributions = 1 year of residency no matter where you were/are domiciled.

As regards combining Tax and NI I think the solution will be emeliorated by increasing the initial threshold as has already been muted. The cost of collecting tax from wage earners and pensioners in reciept of moneys below £10,000 or even £12,000 is disproportionate to the actual amounts collected. If all this crazy bureaucracy could be streamlined a lot of people on the lowest incomes could be helped, without further govt. assistance.

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Ivan Christie

Oct 25, 2010 at 17:17

It all sounds great, but wait until we see the fine detail and I doubt if we will be so pleased. Remember the old advice that if it sounds too good to be true, it normally turns out to be so!!

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Graham Barlow

Oct 25, 2010 at 17:18

If you are contracted into SERPS in your scheme the scheme will be entitled to restitution of all increased payments plus interest, if your Serps benefits are cancelled. Your scheme signed a contract with Newcastle, and any Judge would deem it a breach of Contract. if the state failed to meet those obligations.

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Jonathan

Oct 25, 2010 at 17:25

Graham, I think the idea of the move is so that people are more likely to contribute to a pension scheme even if they have a small pot. Currently someone needs a pension pot of around £100,000 before they will be equal to someone who has no pension as the person with no pension would have their income made up with income support toso their income is around £10,000 to £12,000 . If the basic level of pension is increased and not means tested, more people will want to contribute to a private pension so that they can actually increase their retirement income even with a smallish pension pot.

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John robert

Oct 25, 2010 at 17:33

Your comment assumes a NEST fund will produce a decent pension.

It all depends on investment performance and annuity rates. Very likely it will be worthless.

NEST looks like being the next mis- selling product.

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Chris Powell

Oct 25, 2010 at 17:34

Graham you have missed the point. Because of the last government any one on a low wage saving for a pension was mad. Means testing is stupid at the best of time because it costs so much to enforce. However, for pensions it means that some people who would lose their benefits would be like having an 100% tax on their pension.

The last government just did not have a clue! There's been so much academic research on this in the US over the last few decades I cannot believe a new government had to point this out.

To encourage saving you should not penalise the ones who already do and encourage the ones who have no reason to save.

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Graham Barlow

Oct 25, 2010 at 17:35

Those already in receipt of SERPS need have no fear, They cannot take that away without commiting suicide. The contract was made when the scheme was contracted in. The only way they can claw back is make the Old age pension means tested against all other income ,Private Pension, Serps, etc. They are already discriminating against thrifty pensioners by cancelling their age Tax Free allownce above a certain level of income nullifying a large part of the Old age state Pension, The £140 will bring in millions more who will lose their age allowance. The mor damn silly Laws you make the Worse and more complicated it becomes.

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Anonymous 3 needed this 'off the record'

Oct 25, 2010 at 17:37

At last a great idea, provided the test is being a UK TAX resident for say, 20 years to receive the full amount, 15 years for 75%, 10 years for 50%, 5 to 10 years 25%, under 5 years ZILCH!

Government should never have got involved with providing salary related state pensions, it should limit state provision to the flat rate proposed above.

As a safeguard, all existing Graduated, SERPs and S2P pensions should be immediately made paid up and the value protected by revaluing at 2.5%pa until retirement.

NI should be merged with Income tax, but the basic rate threshold should be raised immediately to say £10k with the aim of increasing in stages to £15K thus ensuring that most pensioners will pay no tax at all on their state pensions and small additional private pensions.

NEST should be scrapped. Why not do the simple thing and make contributions into existing Stakeholder plans compulsory? The infrastructure and plans are already in place. The Government could reduce Stakholder charges to say 0.75% maximum annual charge from the current 1.5% for ten years and to 0.5% thereafter?

The PADA Quango could then be scrapped with immediated effect.

The Triviality commutation limit should be raised immediately to £50,000. This would encourage many small savers to save long term in a pension safe in the knowledge that if they accrue a small pot they won't have to buy an annuity but can have the lot out as a tax free lump sum.

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Graham Barlow

Oct 25, 2010 at 18:00

I hear what all you optimists say loud and clear, but I urge you all to be vigilante. From first hand experience when Darling tried to slip through a 50% reduction in a Widow's heritable rights under Serps in the year 2000. He claimed that Parliament had legislated this, but I was able to prove , if they did they failed to communicate this to the Govt Pension staff ,who in turn failed to communicate this to schemes that bought into SERPS. This went on for 2 years until Darling was forced to change the L:aw. A classic case of mis selling . They are already hammering Thrifty Pensioners by cancelling their Age Tax Free allowance if the State Pension takes them over a modest level of income. So do tell me where this big incentive to SAVE IS.

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Mike Greenland

Oct 25, 2010 at 18:04

Get rid of all the silly extras pensioners get, bus pass, winter fuel payment, cold weather, free TV licence etc. Add up the cost of those and the bureaucracy saved and add it to the pension and say to pensioners "spend it as you want - but stop winging". btw...I am a pensioner.

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Nick Lee Bates

Oct 25, 2010 at 23:37

A flat basic state pension doesn't remove the need for nest - in fact it removes an objection/disincentive to save. Not really a huge leap - it is the only way such a ponzi system can be sustained. The current system - considering the changing demographics of the country is really unsustainable. I can see NIC's being abolished - the tax bands will be increased to compensate. Thus saving £££££'s on having a single system.(which means more job loses) I feel sorry for individuals who have "accrued" SERPS/S2P and will be the real losers. Looks like contracting out was good advice after all.

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Victor Meldrew

Oct 26, 2010 at 00:58

I read "a higher state pension is fairer for all" and immediately imagined John Lennon singing it instead of "A working class hero is something to be." OK I'm going nuts.

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pensionpost

Oct 26, 2010 at 10:00

Does the reference to "future pensioners" mean-

(1) everyone who is entitled to a state pension during some period in the future, or

(2) everyone who becomes entitled to a state pension after some future date?

I'd like to know so that I can decide whether to carry on with voluntary NI contributions to get a full NI record.

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sammy

Oct 26, 2010 at 12:58

Somehow I doubt that it will be increased pensions "for all".

We will probably find this is to happen 'sometime in the future' and will then only apply to pensioners retiring from then and not to "all pensioners"

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Bernard

Oct 27, 2010 at 15:11

Part of my taxes, local and national goes to fund the extra £4840 that fire service staff get in addition to their salary.because they live in London. I am 85; I also live in London but get nothing extra.

Is that fair?.

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Loadsawad

Oct 31, 2010 at 08:51

Actually it ISN'T a £40 a wek rise. Indexation would add about £20 to the state pension by 2015 anyway. Correct that £20 for 5 yrs RPI inflation, take off 20% income tax and the so-called £40 increase is in reality more like £10 or £12 a week more net pension in real terms than many of us would have got anyway

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Andy Mann

Oct 31, 2010 at 11:59

If the basic state pension and S2P SERPS were to be means tested, there would no point whatever in saving for ones retirement or paying into a stakeholder pension scheme. Why would anyone save for their retirement just so that they can lose out later on their state pension? On what basis could NI contributions be collected, if no pension accrued thereby? What would stop people from coming from the EU just to get the £140 per week? The government need to think things over carefully and consult closely with pensions industry experts before making these pronouncements.

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david harrison

Nov 01, 2010 at 06:44

According to The Sunday Daily Telegraph article yesterday existing pensioners wont be eligible for the £140 a week pension we continue on £97 a week- if true dosent seem fair.

I left school at 15 and retired last year and worked 50 years contributing to the government pension - now we hear that you no longer have to put in all thodse years of contribution for a fiull pension.

Totally unfair - but nothing suprises me in this Country anymore.

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