Is a flat £140 weekly state pension viable?
Retirement | State Pension
By Justin Modray, published 29 October 2010.
How viable is the Government's plan for a flat £140 weekly pension? And might you benefit or lose out from such a scheme?
The Government has said it'd like to introduce a flat £140 per week state pension by 2015. This means doing away with additional state pension entitlement, i.e. the state second pension (S2P), and the current pension tax credit system that guarantees a minimum weekly income of £132.60 for those with low incomes. It also seems qualification could be based on residence rather than National Insurance (NI) contribution history (in which case immigration controls would need to be tightened to reduce drain on the system).
On the one hand a simple system is good and costs less to administer, the current SERPS/S2P and tax credits regime is ridiculously complex. And those on lower incomes should get a higher pension. But a flat state pension could cause a lot of confusion and potential inequity. And effectively represents yet another tax rise for higher earners.
Will it apply to everyone, or only those retiring from 2015?
Unknown at present. I guess it depends on whether the net cost to the Government ends up being positive or negative. However, if it doesn't also apply to those who've retired before 2015 then it'll create an inequitable two tier system.
What happens if your additional pension entitlement is higher than £140 per week?
Again unknown. Reports suggest the Government would look to preserve benefits for those with SERPS/S2P entitlement that pushes their state pension above £140 per week. However, given proposals for the flat pension have yet to be published I think it's fair to say this is all hot air, so we'll just have to wait for more solid proposals further down the line.
What if you've contracted-out of SERPS/S2P?
You guessed it, unknown. It seems logical that the £140 pension would be reduced based on how long you've contracted out, else those who've contracted-out could profit versus those who haven't (and conventional wisdom in recent years has been not to contract out). But if plans for a flat state pension turn out to be serious then you might profit from contracting-out until 2015, depending on how the pension is eventually implemented.
What if you've purchased extra years of NI contributions?
Unless the flat pension plans build in provision for this then your extra contributions might turn out to be a waste of money. But again, we'll have to wait and see...
How can the Government afford to pay a higher state pension?
It can't unless it reduces the overall cost going forwards. We're living longer on average and our ageing population means there'll be fewer people working to fund those in retirement over the next 30-40 years, which will seriously stretch the state pension system. The retirement age is rising to combat this, but it probably won't be enough alone. So the Government must be pretty confident that a £140 flat weekly pension will cost less overall than the existing system over time - else taxes and the retirement age will have to continue rising to fund it.
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Readers' Comments (2) - To post a comment please register or login
Comment by malcysykes at 11:25am on 16 Jan 2011:
State Pension Scheme proposals for 2015 - The key proposals are that from that date, all individuals newly retiring will receive £140 per week. This will not apply to people who retired before that date, to whom current arrangements will continue to apply.
The affect of this on married couples is staggering. A couple retiring under the new scheme will receive £280 per week between them, whereas a couple who retired just before will continue to receive the couples’ rate of £156.15 per week (rate for 2010)at most.
This difference of £123.85 per week sounds alarming, but is more so if you consider the capital equivalent of this “loss”
£123.85 per week amounts to £6,440.20 per annum. If you look at how much a couple would have to invest in an annuity to make up this difference on a like for like basis, the figures are remarkable.
The annuity would need to be an escalating one to match the terms that the couple who retired post-2015 would receive on this difference. To be fair in comparison, the annuity could be a cheaper single life one, as the post-2015 couple would lose £140 of their joint income should one of them die. A male of 65, on this basis, could receive an annuity of, typically, 3.6%. This is the fairest option once again, as a woman would receive a worse rate.
To make up the difference, the cost of the annuity would be £178,894. As this would be a lifetime purchased annuity, there would be some tax advantage on the income generated compared with the post-2015 couple. However, this is more than cancelled out by the fact that the pre-2015 couple will have paid tax on the earnings necessary to generate the capital needed.
In effect, a couple retiring just after the changes are being gifted almost £180,000 compared to a couple maybe just retiring. FAIR?
Comment by brassedoff at 11:13pm on 19 Jun 2011:
in 1998 I sent for a pension forecast, it told me I had 32 yrs of contributions, 7 years short of the required 39 necessary for a full state pension in my own right. I followed their advice and for the next seven years paid voluntary contributions.
It was upsetting to say the least when a year later it was reduced to 30 years, I did'nt receive anything back from the £3000 I had paid. These new proposals by mr. Webb will now dismiss my and all current pensioners rights to receive the basic state pension after Oct 2015 and we will all be approx £40 per week worse off than those who retire after Oct 2015. How can this apatheid be fair, we all live in the 21st century and are subject to the same food prices and utility bills.I think a lot of pensioners are unaware of how these proposals might affect them ,perhaps the furore over staggered retirement dates is uppermost in peoples minds at present and these unwittingly create a bit of a smokescreen surrounding the2015 cut off date proposals, I'd love to see some on line petitions and more coverage generally , what has it come to when we have to fight for our democratic right to an equal pension , please write to your M.P's etc .We have to at least try and prevent this from happening.