Options for the switch to a flat rate state pension were announced by the UK government on April 4, 2011. Why is the country's pension system changing, what are the options under consultation and how might this affect pensioners?
Why is the State Pension System Changing in the UK?
In an interview with the BBC on April 4, 2011, Pensions Minister Steve Webb stated that the new system will create a "simpler, clearer foundation". It is hoped that a new structure will be fairer to all pensioners. It will also compensate for extended working lives, increased longevity and a decrease in guaranteed final salary pension schemes. It will encourage people to save for later life themselves as they would have a more definite idea of their income in retirement.
How Will Proposals Change the UK State Pension System?
Changes to the UK pension system have been discussed for some time with details finally being announced in a green paper (A state pension for the 21st century, Department of Work and Pensions, April 4, 2011) to launch the formal consultation process. At this stage, there are two options that could be implemented in the future.
The first would see the current two-tier system changed to a full flat rate system with no means-testing. This option would see each eligible individual paid a fixed sum each week. The second option would keep the two-tier structure but would switch the second state pension to a series of flat rate payments. Eligibility would still be linked to National Insurance (NI) contributions.
How Much Will a Flat Rate Pension be Worth?
If the state pension were changed to a single flat rate, it is anticipated that a weekly payment would be worth around £140 a week (today's value). Due to inflation increases over the years it would take to actually implement a switch, however, it is projected that payments could total approximately £155 per person per week.
Under the proposed two-tier structure, each qualifying NI year would equal £1.60. This would be paid on top of a basic payment as a replacement for the current second state pension system. No date has been set for any change, although it is unlikely to happen before 2015/6.
How Will Pension Changes Affect Pensioners?
The switch will not apply to people who are already claiming a state pension or who will do so before the new system is in place. Their payments would carry on being made according to current rules and the UK will run on a dual system for a number of years. If changes are made, then pensioners at that time will be paid under whichever system is chosen.
Although changes to the system are only at the consultation stage at the moment, these are part of a broader set of amendments to the UK pension/retirement system. The government has already started to phase out the Default Retirement Age and plans are underway to increase the official age of retirement. The current green paper will also investigate options to further increase the state pension age to track longevity in the future.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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