Pension Scheme

The White Paper published this week means there is going to be a significant change to state pensions paid from 2017.  There will be some winners and inevitably some losers.  Institute for Fiscal Studies warned that Monday’s proposals would mean a cut in pension entitlements for the majority of people in the long term.

The proposed scheme will set a flat rate payment based on 35 years of National Insurance contributions.  This will be an increase from the current requirement of 30 years’ contributions so may catch many individuals out, who may need to make Class 3 Voluntary Contributions to make up any shortfall.

Pensions Minister, Steve Webb, told BBC News the current means tested system will be eliminated in favour of a “single, simple, decent state pension.”

Critics of the changes have said the Government’s proposals will mean people will work for longer and pay more to receive their pension, with predictions that the pension age will be raised.  Others may also receive less than they would using a means tested system and receiving pension credits.

Retirees will be subject to a single tier pension of £144.00 per week (at today’s rate), as opposed to the current full state pension of £107.45 a week, which can be topped up with pension credits.

The measures outlined could mean the biggest shake up of the pensions scheme in decades, and detractors from the scheme have criticised a Government assumption that people can afford to save money for their old age to add to a state pension.

A statement released by IFS said: “It is important to be clear that – while there will be a fairly complex pattern of winners and losers from the reform in the short-term – the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups (most notably the self-employed).”

Malcolm Small, Senior Pensions Policy Adviser at the Institute of Directors, said: “The introduction of a flat-rate state pension, with an end to means-tested retirement income benefits, is essential if pension saving is to make sense for modest earners. The end of the State Second Pension will also help simplify an arcanely complex state pension system, and help give prospective pensioners a clear idea of what the state will provide – and just as importantly, what it won’t.

“These proposals are not perfect. With the end of ‘contracting out’ there will be more National Insurance to pay for many employers, and employees. The prospect of a cliff edge in April 2017, where those retiring one day are stuck with the old system and those the next day are on the new system, is hardly appealing.

“And there will be some losers in terms of state pension outcomes. But the greater good is served by having a simple, understandable, state pension, which gives a clear platform and incentive for additional saving.”

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