State pension is ripped up in radical reforms

Ben Southwood
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THE COALITION will finally unveil its pensions white paper at 3.30pm today, unleashing a raft of radical reforms on the UK state pension system.

Pension groups have welcomed the changes, which introduce a universal state pension of around £145 per week, cut down on means-testing, and end a “horrendously complex” four-tier system.

The proposals will make it easier for the self-employed and women to qualify for a full state pension. But they will also hit firms offering final salary or money purchase pensions, as well as employees with these schemes, as they end contracting out, which reduced national insurance bills. The Confederation of British Industry came out against the plan in 2011, asking the government to balance it out by letting firms adjust the accrual rate.

Saga director-general Ros Altmann hailed the reforms for finally bringing an end to a pensions system among the most difficult to navigate in the world.

“These are brave proposals, but are long overdue in order to improve pension provision for our ageing population,” Altmann said. “With these proposals, however, future pensioners should eventually have a system that is simple, clear and understandable.”

■ The current pension system is a confusing mix of means-testing, contributory benefits, credits, as well as the basic state pension.

■ From April 2017 there will be just one state pension – those with 35 years of national insurance contributions (or equivalent) will get around £145 a week in today’s money, expected to be roughly £162 per week by then.

■ Under the new system everyone must make at least 10 years of contributions to get the pension, which would start at £41 per week, rising with years of contribution.

■ This will end any earnings-related element of the state pension.

■ The level is set at around £145 a week in order to be just above the level of the pension credit guarantee credit. This means most future pensioners with a full national insurance record would not qualify for pension credit means-testing.

■ Since the new system will get rid of most means-testing, pensions groups say it will boost incentives to save.

■ Contracting out – charging firms and employees a lower national insurance contribution rate if they forgo the contributory element of the state pension – will be abolished. Firms will pay the usual 13.8 per cent of pay over £7,696, instead of the 10.4 per cent over £5,668 they paid under contracting out. Employees will pay 12 per cent above earnings of £7,748, falling to two per cent on earnings over £41,444, not the 10.6 per cent on earnings between £5,668 and £40,040 they paid under contracting out.

■ A complete shift to the new system will take a long time, as many have built up entitlements in excess of £145 per week and these will not be lost.