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Gov’t unveils flat rate state pension plans

by Brian Cantwell on Jan 14, 2013 at 15:56

Gov’t unveils flat rate state pension plans

The government has published its long-awaited white paper on state pension reform outlining detailed plans for the implementation of a £144-a-week flat-rate state pension.

The paper confirmed measures requiring a longer record of national insurance contributions (NICs) and measures to soften the blow for higher earners affected by the abolition of contracting out from the secondary state pension.

The paper, which has twice been delayed, confirmed a hike in the number of years of NICs required to qualify for the full state pension from 30 to 35, and introduces a minimum of 10 years of NICs to qualify for any state pension.

The £144 flat rate state pension will be uprated by the ‘triple lock’ meaning it will go up by the higher of earnings, prices, or 2.5%.

State pension entitlements over £144-a-week will go up in line with the Consumer Prices Index.

The government said the flat rate state pension will be implemented in 2017, at the earliest.

The paper has set out a series of measures to factor in the closure of the secondary state pension and the abolition of contracting out.

Contracted out employees will be fully bought back into the state system and start to pay full NICs, an increase of 1.4% of relevant earnings.

However, the government said that 90% of those who reach state pension age in the first 20 years after the reforms have been implemented will gain enough extra state pension in retirement to offset the increased NICs they will pay over the rest of their working life.

Where an individual has previously contracted out, a deduction will be applied to reflect the fact they paid lower NICs.

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21 comments so far. Why not have your say?

Bob Donaldson

Jan 14, 2013 at 16:20

As long as they do something and stick with the plan rather than constantly tinkering with state pensions then I have no objection with that.

However, it is interesting that what may have been perceived as bad advice in the past to contract someone out might now be perceived as the best advice they could have had.

I tell my clients not to trust anything the government does on state pensions as they can change it on a whim. The only thing you can rely on is what you do yourself in the first instance or through your employer, and then trust them sparingly as they will change the rules at the drop of a hat!

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Chris Geeson

Jan 14, 2013 at 16:22

Fundamental error Bob, the use of the word "plan" or even assuming there is one

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Alistair Hinton

Jan 14, 2013 at 16:26

Fair comment and an understandable stance, but advisers are supposed to provide advice based on as full an understanding as possible of all relevant legislation pertinent at the time that it's given and not predicated upon speculation as to what the current or future governments might do to change it between then and the time when the advice has to be put int practice at state retirement age; after all, who knows whether the government of the day will even be able to afford to fund state retirement benefit at all in 2017?!

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Rob Simpson

Jan 14, 2013 at 16:39

It also has the same effect as every other change to the State Pension since 1978. Collectively, we will get less.

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Alistair Hinton

Jan 14, 2013 at 16:43

@ Chris Geeson:

Another fundamental error - at least of presentation - is to continue to perpetuate the myth that the subject is a "pension"; a pension is an investment into which an investor invests capital sums and/or regular payments over a period of time and takes an income from the fund so built up at a later date in the hope that sufficient growth in value will have justified that investment in the meantime, whereas what the government pays to people of over state retirement age is state retirement benefit which is not funded from the investments of pensioners over an investment term at all and accordingly can involve no possibility of growth in value over time. Futhermore, it's not even correctly named as state retirement benefit because its only relationship with retirement is that it is unavailable until those entitled to receive it have reached state retirement age; they no more have actually to be "retired" than do real pensioners with real pensions.

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John Borgars

Jan 14, 2013 at 16:53

@ Alastair Hinton

In the days when governments were expected to tell the truth it was called the old age pension.

" a pension is an investment into which an investor invests capital sums and/or regular payments over a period of time " NO: a pension is a regular payment to an individual during his/her lifetime; there is no requirement for him/her to have made any contribution whatsoever.

If we are to have a serious discussion, then it helps to start with the truth

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Bob Donaldson

Jan 14, 2013 at 18:00

The fundamental point is that you cannot trust any government of any colour to deliver on anything. Whilst they can change the rules on your pension built up using your own monies, at least you own it.

How many people are now going to disadvantaged by the abolition of S2P or SERPs as it was better known.

I loath this government and every other one before it and the constant tinkering and changes they make to peoples financial lives. How can anyone have any confidence in the UK pension system with the mess they have made of it and continue to make of it.

Bad day at the office today!

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Alistair Hinton

Jan 14, 2013 at 18:16

@ John Borgars:

I'd not realised that governments were expected to tell the truth in the days when the phrase "old age pension" still possessed some currency. I think that the rest includes some splitting of hairs. Government payments to people in retirement are indeed not out of any kind of pension pot built up by those receiving them; they are therefore state benefits, not "pensions" per se. A true pension involves investing over a period of time and then vesting the pot built up, which is a different animal altogether from whatever the government of the day might choose to call its state retirement benefit.

I think that we are already having a serious discussion.

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Keith Cobby

Jan 14, 2013 at 18:43

A week is a long time in politics, 5 years is an eternity. This can has been kicked into the next Parliament.

It will be implemented in 2017 - at the earliest!

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Philip Wise

Jan 14, 2013 at 18:51

I think this is all very clever.

The government has got away with it so far.

From 2017, it scraps contracting out for final salary schemes (only really availalble to government employees). Employers with final salary schemes pay more NI (but as the government is the employer, no change there).

But so too do employees. So the average civil servant will pay contracted in rates.

The result - the government gets to keep more of the civil servants wages, in exchange for a vague promise of some sort of pension one day. The government gets to keep more money now, and just makes a vague promise about paying more money in the future.

Added to that is the fact that nobody knows when the new pension is going to get paid - linked to life expectancy, with people getting state pension for the same proportion of their lives as they do now (neatly, nobody knows what proportion of our lives we get state pension for now...)

Will the Unions cotton on? And if they do, will they be able to explain it?

One of the things I like about the "flat rate" pension scheme is that nobody is going to get the same pension as anybody else. "Flat rate" now means "less variable than it used to be" apparently.

The state pension has at least been moved down the scale of complication from "totally impossible to understand" to "impossible to understand".

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John Borgars

Jan 14, 2013 at 19:59

@ Alastair Hinton

Crichel Down

Dalton's resignation

Public enquiry over Wilson's smear of Thorneycroft

All in my lifetime

Prior to 1964, governments were expected to tell the truth and Bevan's brilliantly coruscating denunciation of Eden over Suez (history shows than Eden was right and Dulles was wrong, but that does not detract from Bevan's rhetoric) relied on that assumption.

I told you what a pension is, which you appeared not to know: I don't think that is splitting hairs. Possibly you think that the word "pension" only applies to a personal pension fund invested through, or on the advice of an IFA: well, actually it means an annual or quarterly or monthly payment: tough! Buy a dictionary. A fund is not a pension.

The BBC is following the Grauniad line by claiming that a majority of those not yet into the workforce will be worse off by the reforms, which is mathematically impossible (although a minority, mostly in the civil service and those craft unions, whom SERPS was specifically tweaked to benefit, will be worse off, the majority will benefit).

For a serious discussion we need to recognise that old age pensions are, at least nominally and formerly really, dependent upon NI contributions by the pensioner and/or her husband. In my youth (I don't know how old you are) NI contributions were set at a level whereby the totality of women's contributions covered pensions of women who claimed solely on their own contribution record, contributions from bachelors and married men plus a 16% subsidy from the Treasury paid for their pensions plus the additional pensions for wives and widows. That is all in the standard textbooks. The contributions were notionally invested in gilt-edged - in reality they reduced the amount of gilt-edged that needed to be issued and probably the interest rate that needed to be paid (psychological rather than purely economic effect); so there*was* a pot out of which pensions were paid. To a lesser extent there still is although the misappropriation of NI contributions into general revenue by Gordon Brown has dislocated this. The augmentation rates for deferring the commencement of old age pensions are based on out-of-date mortality rates, averaged over women retiring at 60 and men retiring at 65 (so heavily biased towards women, but that was deemed acceptable because women, on average, had lower incomes).

I welcome, on intellectual grounds, although it has no impact on me (except to delay my wife's entitlement to pension) the move to re-align normal retirement date as length of healthy life extends. The last couple of decades when retirees were visibly better off than those working (because their pensions had been calculated on the assumption that retirement was less than one-fifth of working life while those still working had to assume it was more than one-third) provoked envy. The change in school-leaving age from 14 to 15 to 16 to a proposed 18 alters the worker-dependent ratio, which the increase in longevity exacerbates. Raising the retirement age offsets but does not fully balance this.

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Alistair Hinton

Jan 14, 2013 at 21:16

@ John Borgars:

All interesting points, for which many thanks, but the underlying fundamental problem is this; the quaintly and at the same time quite misleadingly termed "National Insurance Contributions", notwithstanding the original intention behind the concept of them, may still be "national" but they "insure" no-one against the risk of anything and are not "contributions" in the generally understood sense because they're supposedly compulsory. Furthermore, "National Insurance Contributions" paid by those obliged to pay them are merely tax by another more convoluted and clumsy name (especially NIC4) and, more importantly, instead of being invested on behalf of the contributor (in gilt-edged or any other kinds of securities as you appear to suggest), they're paid out in benefits to others entitled to receive them within 1-2 weeks of their receipt by government; they are therefore not "invested" on their "contributors' " behalf towards anything at all, so they cannot be seen as forming any part of a realistic "pension pot" that might grow for the contributor's benefit up to the time at which he/she might vest it; a BBC Panorama programme looked into this some years ago and found that it had no option but to arrive at a conclusion broadly in line with this. In other words, it's only one stage up from a government-sponsored Ponzi scheme and, when the unresolved deficit has gotten to be bad enough and the government of the day is no longer able to borrow sufficient funds to help it to pay out benefits including state retirement benefit and finds itself with no obvious option but finally to admit to this, it will start to go under and, at that point, it will be too late for heads to roll or for it to matter whether or not they do so or whose heads they might be.

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John Borgars

Jan 14, 2013 at 22:04

@ Alastair Hinton

So: why are the self-employed not covered for unemployment benefit?

I've heard the same junk many times. It does not answer that question.

Moreover, it does not turn a pension into a pension fund or vice versa.

If you want to complain about Gordon Brown levying an extra 1% of earnings and pretending that it was NI and not income tax, go ahead but don't insult Attlee just because he's dead. The original old age pension was taken over from the fully funded schemes of the Friendly Societies with an Exchequer subsidy for those brought into it who hadn't been members of Friendly Societies. If you are an IFA, you should know that.

In the 1930s to 1950s the BBC was trustworthy: in the 1960s and 1970s the BBC World Service was. Since Mrs Thatcher attacked the appalling overspending and waste.... A disc jockey who couldn't get a private sector job paid £13 million per annum - who needs investment bankers to complain about?

It appears that you are incapable of comprehending substitution effects. Cash flow is the same whether you issue new gilt-edged to the NI fund and cash in old ones to pay pensions or you pay the cash to meet current pensions. In fact, for most of my lifetime NI contributions from workers have exceeded pension payments so you are basing your complaint on a media myth.

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SJ

Jan 14, 2013 at 22:55

So if you pay in for less than ten years you get no pension at all.

That'll be equivalent to a reduction in yield of, umm, lots and lots, won't it?

Didn't the government bring in stakeholder to try and stop this sort of thing?

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Alistair Hinton

Jan 14, 2013 at 22:58

@ John Borgars:

I'm not specifically "complaining" about anything - merely mentioning; you, on the other hand, appear to be complaining at least about ow governments in recent times have become dishonest.

Time to return to the topic, perhaps?

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lee rawding

Jan 14, 2013 at 23:06

I heard Webb earlier today blithely using the example of the backpacking Australian barman (who won't build up enough NI contributions of course) to imply the new scheme is better.....Good grief!

It might be simpler than means testing for many but there are more losers, and influential losers at that, than they'd like to admit.

I agree with Bob.

Having set up a contributory, earnings related scheme and made one hell of an issue out of contracting out of it, the present government have made a mockery out of the last few decades for those who remained committed to the 'promises' made then.

Massive redistribution of wealth via capped S2P benefits followed by this little stunt this lot are more socialist than the socialists!

Auto enrolment, with it's twin sister the flat rate state pension are the way forward it seems for a lot of people. God bless all who sail in 'em.

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John Borgars

Jan 14, 2013 at 23:26

Sure, but initially it was you who was claiming all governments for last century were dishonest.

A flat rate pension that covers basic needs with the option/ability to save up to provide a higher income if one wants is so obviously the right choice that one has to wonder at the motives of those who disagree.

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Alistair Hinton

Jan 15, 2013 at 07:27

@ John Borgars:

I did not and do not claim that ALL governments in Britain during the past 100 years have been dishonest IN EVERY PARTICULAR; I do, however, question the extent to which some of them have misled their electorates from time to time and, notwithstanding the best will in the world, the original idea of "ninepence for fourpence" has always struck me as one of those examples that, because it sounds too good to be true, it probably is. Much has changed since those days, of course, in terms of how the state benefits system functions and the sheer scale of it today is out of all proportion with expectations at its outset.

As a matter of fact, the idea of replacing the current state retirement benefit system with what is now being proposed seems to me like a considerable improvement, not least because its comparative simplicity should make it much less expensive to administer so, to that extent, I agree with you; for like reasons, it would make great good sense were the remainder of the tax system to be drastically simplified - after all, the taxpayer has to fund the running of the benefits system and the tax system. Where I almost certainly part company with you, however, is that, however laudable a principle this new benefit system might seem, it will count for little if it cannot be funded without massive and impractical borrowings and accordingly disintegrates over time.

By the "option/ability to save up to provide a higher income if one wants" I presume you to refer to other non-state pension arrangements in which an investor can choose to invest (and will need to, as basic state retirement benefit will not provide a living income); if that is indeed what you mean here, you identify correctly that pensions are one things and state benefits are quite another.

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Paul Barnard

Jan 15, 2013 at 09:06

In one's lifetime there will be situations when you appear to "win" and others when you don't. That is how life is - it is never universally fair to everyone. That is uncontrollable by the individiual, to a greater or lesser extent.

What is in the individual's control is how they react to the situation and turn it into a positive wherever possible.

I think that this is broadlt positive for women who have had work breaks and also fairer for those who have saved a little, yet would have been no better off as Pension Credit would have taken them to the same figure anyway.

For the two main protagonists on this thread, it has nothing to do with semantics.

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Alistair Hinton

Jan 15, 2013 at 09:22

@ Paul Barnard:

No, I agree that has nothing in itself to do with semantics; however, comparing (for example) the present system with that which is proposed from 2017 onwards is one thing whereas questioning the extent to which any state retirement benefit system can adequately be funded indefinitely by the taxpayer is quite another but equally pertinent, I think.

Subject to the details (in which the devil always lurks, as we all know), I agree that the proposed system makes better sense than the current one; the reduction in administrative costs (including a consequent reduction in margins for error), the fairer recognition of the needs of those who have not been in a position to "contribute" as have well-paid employees with unbroken employment records and the clearer identification of the distinction between state benefits and investing in pensions strike me as just three positives here; there may well be others but, from where I'm sitting right now, it's hard to see the negatives.

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thomas west

Jan 15, 2013 at 10:37

From the information gleaned from Channel 4 last night it seemed there would be more winners than losers. Lets remember that the full State Pension was only available after 40 years of contributions so in my view 35 years is ok, the flat rate system means that we all know where we are. The current system has about 75% of retirees claiming the additional benefits so the flat rate system would seem to cut out extra admin etc. Sure occupational pension scheme members will have to pay a bit more however they will benefits from the higher state pension as well.

The only real losers are those who would have been able to receive the maximum SERPS pension; their benefits are being cut, and far from this being 'cost neutral' the govt will actually save money!

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