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The Flat Rate State Pension

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Changes to the State Pension.

When the state pension was introduced in 1909, the maximum payment was five shillings (25p) a week – the equivalent of about £20 today and was not payable until the recipient reached age 70. There was also a form of means testing so it was only payable to the poorest. Clearly we have come a long way since then but the current system is no longer affordable.

The white paper published this week outlines plans for an overhaul of the state pension system. This will see a single-tier pension of £144 a week at today’s prices being paid to every qualifying new pensioner from April 2017 at the earliest.

The maximum state pension for an individual is currently £107.45 a week. There are also additional payments from the State Second Pension, or Serps, which is the government’s earnings-related additional pension and an additional means tested  top up for the less wealthy. This additional amount is called the Pension Credit, or Minimum Income Guarantee. Those who qualify are guaranteed a weekly minimum £142.70 for a single person and £217.90 for couples.

There are also rules about the period for which the pensioner must have paid or been credited with NI contributions in order to receive the full state pension:

those  reaching the state pension age on or after 6 April 2010 need to have 30 qualifying years to benefit from the full basic state pension;

those who reached the pension age before April 2010 will need 39 qualifying years (for women) or 44 qualifying years (for men) during a regular working life to benefit from the full state pension;

for couples with only one person qualifying for the basic state pension,  top-up state pension payments of up to £64.40 a week can be payable based on one partner’s National Insurance record.

The government says this is all too complicated. The aim of the proposals is to simplify the system by getting rid of all the means-tested sections entirely, for all those retiring from April 2017.  There will be a flat rate pension of £144 a week at today’s prices for all those who reach their state pension age and have 35 years of National Insurance contributions. Those who start receiving a state pension before April 2017 will not be affected.

The intention may be to make the system simpler – but it still will not be simple. A simple system means that it should be easier to explain why people need to save more – on top of the state pension – for their retirement years.

There will be winners and losers under the new system.

The self-employed, who have received a relatively small state pension, could also benefit. Those who have taken time out of work to care for children, or people with disabilities will have access to the enhanced single-tier pension.

Existing pensioners will remain in the old system, so they could be slightly worse off than new pensioners.

In the long-term, those who are aged in their early 20s now may be worse off than they would have been under the current system.

Anyone who has not paid NI for at least seven, or possibly even 10, years will not qualify for the new single-tier state pension at all.

Clearly the removal of the pension top-up should provide an incentive for those looking towards retirement to make more provision for themselves as they will no longer be disadvantaged by having their savings means-tested for pension benefits.  In the long run however the pension is likely to become less generous for those now in their 20s and younger.  The present system of tax relief on private pensions is to continue.  Remember that every UK resident is able to receive tax relief on pension contributions from the minute they are born.  If parents and grand-parents are looking to help their children and grandchildren, it is worth considering a pension contribution for them.  A £2,880 net contribution into a pension for a child or grandchild will be boosted to £3600 with the addition of tax relief.  Current rules allow a pension income to be drawn from a personal pension from age 55, whereas the state pension will not be payable until age 68 from 2046.

Graham Westhall BSc(Hons) CAifs APFS, Chartered Financial Planner