Member Article

Pension scheme shake up anticipated for 2017

State pensions will change to a “Single Tier” system, the Government have outlined in a White Paper.

The reform will create a flat rate pension set above the means test, and based on 35 years of National Inusrance contributions.

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.

As opposed to the current full state pension of £107.45 a week, which can be topped up with pension credits, retiring workers will be subject to a single tier pension.

The Institute for Fiscal Studies released a full analysis of the anticipated measures, and called the pension reforms “straightforward,” but warned that “the overall effects will be more complex.”

IFS said there would be winners and losers as a result of the changes, with self-employed people coming out on top, while members of contracted out defined benefit occupational schemes may also win out.

Higher-than-average earners could also have an advantage along with people who will reach state pension age after 2017 with 30 years of basic state pension accrual, but have not yet earned a state pension.

IFS warned, however, that Monday’s proposals would mean a cut in pension entitlements for the majority of people in the long term.

The measures outlined in the media 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).”

Dr Ros Altmann, Pensions expert: “Such radical state pension reform is long overdue and it will be a huge step forward to have a single, flat-rate state pension, without mass means-testing in future. This will make it safer to save, which is essential as auto-enrolment extends across the workforce.”

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.”

This was posted in Bdaily's Members' News section by Miranda Dobson .