A guide to the flat rate state pension

Tuesday, 05 July 2011 11:10

By Kate Saines

In April plans to shake-up and simplify the state pension system were unveiled by the government. Among the ideas up for consultation was a proposal to bring in a flat-rate state pension.

Although the 'flat-rate' is just one option being discussed, it – along with proposals to automatically increase the age people can draw their pension – is the most radical move in the Green Paper which sets out the plans.

And, of course, the question on everyone's lips is how will a flat-rate state pension affect us? Whether you are due to retire in the near or distant future or are already a pensioner, read on to find out more about the new pensions system.

What is it?

The flat-rate state pension is an option being considered under government plans to reform the state pension system. It will replace the current means-tested pensioner benefits and, unlike the current system, will not be linked to National Insurance (NI) contributions.

A single pensioner will receive £140 a week and a couple will get £280 per week under the system which is currently being considered as part of a consultation on state pension reforms.

Why is it being introduced?

The government wants to simplify the pension system and make it easier for people to understand and benefit from.

It also aims to encourage people to save for their retirement. The idea is that because the flat-rate pension will provide men and women with an exact figure of how much they will receive at retirement, they will have a clearer idea of how much they need to save themselves.

The proposals are being considered along with plans to raise the retirement age to 66 for both men and women.

Will we be better off?

According to Turn2us, part of the charity Elizabeth Finn Care, which helps people access money available to them, the new rates are more generous than the current state retirement pension.

A spokeswoman for the charity said: "Currently state retirement pension rates can be topped up with means-tested pension credit to ensure a minimum income of £137.35 per week for a single pensioner and £209.70 per week for a couple."

Clearly the flat rate of £140 or £280 is more generous than this. What's more, the figure of £140 would be offered were the pension to be introduced today. Taking into account inflation, by 2015 this could increase to £155.

To receive the single tier, flat rate pension, people must have built up a minimum of seven years of NI contributions or credits. To benefit from the full amount they would need to have built up 30 years of NI credits or contributions.

However, this is just one option being proposed by the government. The other is to provide a state pension at a basic rate for everyone, then a second state pension providing a payment of £1.60 for every year the recipient has paid National Insurance.

While the flat-rate state pension, or "option one" is considered the more radical proposals it also appears to be the one with the most support. Consultation on these options ended on June 24th. However, supporters of option one are keen for the flat-rate state pension to be introduced as soon as possible – as early as 2012.

Read more: Boosting your retirement fund: Alternatives to pensions

Who will benefit from a flat-rate state pension?

The new flat-rate state pension will only be paid to people who retire on or after the date it is introduced and, at present, there is no information on when this could be.
People already receiving their pension on this date will continue to receive their payments under the system currently in place.

As a result there will be two pension systems running alongside each other until the last person on the original one dies. The government said it would be too expensive to offer the increased flat rate pension to existing as well as future pensioners.

Use the Myfinances.co.uk comparison tables to find a better deal on a pension or annuity

Why is it a good idea?

The government are telling us the aim of a new system will make it simpler for retirees. But it will also provide people with more incentive to save for their own retirement. A survey on the nation's attitude to saving conducted by Legal & General in April, just after plans for the flat rate pension were announced, showed people had a more positive attitude towards saving for the longer term.

In fact, over six months, a third more people said they were thinking of saving for a pension, according to Legal & General's April MoneyMood survey.

Mark Gregory, Legal and General's executive director of savings, said: "The announcement of government proposals to introduce a flat-rate state pension may also be helping to focus savers thoughts on their retirement.

"Those who are looking forward to an income higher than the state pension are more likely to appreciate that the sooner they start saving the better, as their money has longer to enjoy investment growth."

Supporters of the new system are also praising the fact it will put an end to mass means testing. And they are also supportive of the fact it will benefit people who have faced interruptions to their careers and therefore their earnings – for example women who have stopped working to have children.

Dr Ros Altmann, director general of the Saga Group, explained: "Those who have had interrupted careers and did not have a full NI record and therefore did not accrue full rights to state pensions will no longer lose out as they have done in the current state pension system.

"Women have been the poor relations in terms of state pensions but will finally be put more on a par with men."

What are the criticisms?

Critics argue £140 is not enough for a retired person to live on in a week. In fact Standard Life carried out research which suggested two out of three people did not believe this was enough to live on. In the 55 and over age group even more, 72 per cent, thought this was not enough money to survive.

While Standard Life said the fact people could not live on this figure should encourage them to save, other organisations feared for those people who did not have the means to open savings plans.

Dave Prentis, general secretary of Unison, said: "A flat-rate state pension at today's prices of £140 a week is way below the poverty line and a hike in NI contributions will see workers struggle to save for their retirement."

Meanwhile the National Pensioners Convention (NPC) agrees with Unison that £140 is £40 less than the £178 poverty line and, when combined with removal of housing and council tax benefit, will push many pensioners further into poverty.

The NPC is also unhappy the proposals for a flat-rate state pension exclude existing pensioners, particularly around five million older women who do not currently qualify for the full state pension.

Dot Gibson, NPC general secretary, said: "It is breathtaking the way in which the government has abandoned those who have spent years contributing to our society by excluding them from plans to raise the state pension.

"The real losers will be the millions of older women who don't have a full state pension record, but would benefit from these changes."

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