Firstly a very important point. Both proposals only apply to those retiring after the new system is introduced, so if you reach state pension age before then you should be unaffected.
Option 1 - Move the State Second Pension (S2P) to a flat rate by 2020
This would keep the existing basic state pension and accelerate moving S2P to a flat rate basis by 2020 (the current target is 2030). This means everyone would receive the same state pension for a given contribution period, regardless of earnings. But as the extra weekly pension (via S2P) will increase by a fixed amount (c£1.60) for each year worked, those who work longer could receive a higher overall pension.
Option 2 - Scrap S2P in favour of a flat weekly payment for all (no target date specified)
This means a single flat rate of state pension for everyone who meets the minimum criteria for a full basic state pension (currently 30 qualifying years). S2P would effectively be abolished and working for more than 30 years would not increase your pension.
What would happen to existing SERPS/S2P entitlement?
This is the key question for most of us - the proposals are as follows:
Option 1: Existing SERPS/S2P entitlement would be retained, although future entitlement will be at a fixed rate.
Option 2: Those with SERPS/S2P entitlement above £140 per week should benefit from a higher pension to reflect this, but in effect this means they will lose any benefit from SERPS/S2P entitlement between the basic state pension and £140 per week. Those who have contracted out will see their £140 state pension reduced, but no details yet as to how much.
Who might be the winners and losers from these proposals?
Low earners might receive a higher overall state pension.
Those who work for more than 30 years could enjoy a state pension higher than the 'flat' amount.
Those with existing SERPS/S2P entitlement should retain their benefits.
Mid to high earners will receive less benefit from S2P than at present.
The self-employed won't receive a £140 weekly state pension unless provision is made for them to join S2P.
Low earners and the self-employed will receive a higher state pension than at present.
Mid to high earning employees will probably receive a lower state pension than at present.
Those with existing SERPS/S2P entitlement will, to some extent, lose out.
Those who work for more than 30 years won't get any extra state pension.
There's little doubt that the current system of topping up a £97.65 weekly basic state pension to at least £132.60 via pension credits for those on low incomes needs changing. It provides no incentive for many to save towards retirement as they could simply end up replacing money the Government would have otherwise have given them for free.
However, any changes the Government makes will be cost neutral. So a higher flat state pension will effectively need to be funded by mid to high earners via reduced S2P entitlement (or scrapping it altogether), leaving them worse off than at present.
And if the Government pursues option 2 the issue of existing SERPS/S2P entitlement will need to be resolved - and as this is bound to leave to some people worse off it won't be popular.
But perhaps the biggest and most unpopular obstacle will be the 'two class' state pension system any changes create. This would especially be the case under option 2 where retiring just before or after the changes are introduced could mean a quite different state pension, for better or worse.
Have your say
The Government is accepting feedback, see the DWP website for more details on how to have your say.