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Briefing: Simplifying the state pension

14 January 2013

6:11 PM

14 January 2013

6:11 PM

There certainly seems to be something to be said for keeping an effective minister in the same post. After two years and eight months in the job, Steve Webb is by far the longest-serving Pensions Minister since the post was created in 1998. And, as last week’s mid-term review showed, pensions is one area where the coalition has much to boast about: the ‘triple lock’, the Hutton review, raising the pension age, ending default retirement and compulsory annuitisation, and introducing automatic enrolment. And today, Webb has announced the government’s new ‘single tier’ state pension.

At the moment, the state pension system is fiendishly complex: there’s the basic state pension (currently £107.45 a week), the Guarantee Credit (which tops up income to £142.70 a week), the Savings Credit (up to £18.54 a week for those who have saved for retirement) and the state second pension (which is linked to earnings). But for those retiring from April 2017 onwards, these will all be replaced by one flat-rate state pension of around £144 a week (in today’s money – it’ll be uprated in line with earnings so will be more than £144 when it’s actually introduced in 2017). Everyone with 35 years of National Insurance contributions (or qualifying activities such as caring for children or a sick adult) will get the same amount.

Webb describes the plans as ‘a single, simple, decent pension’ — and the emphasis is very much on the ‘simple’. The government’s White Paper says:

‘A key objective of reform is to move to a simpler pension system that gives people clarity over what their state pension will be worth when they retire.’

And the Institute for Fiscal Studies has praise for this aspect of the reform at least: Gemma Tetlow described it as a ‘massive simplification’ and the IFS’s briefing says:

‘The proposed system looks straightforward and — in terms of its clarity — appears to be a clear improvement on the complex miscellany of rules which govern the current system.’

Reducing the means-testing in the system is a particularly welcome move, considering that around a third of those entitled to Pension Credit don’t get it, each losing out by an average of £33 a week.

Webb has also tried hard to present the changes as benefiting those – predominantly women – who have taken time off work to look after children. But the IFS points out that it is only those who did so before 2002 who benefit in this way and ‘in the long run, the reform will not increase pension accrual for part time workers and women who take time out to care for children’. It will, though, slightly close the gap between what the average female pensioner receives and what the average male one does: at the moment, the median woman only gets 75 per cent of the median man’s pension. Instead, the biggest winners are likely to be the self-employed, who do not benefit from the state second pension at the moment. The IFS calculates that most people will get at least slightly less under the new system than they would have under the current one — but as Webb has also been keen to emphasise, high earners are the biggest losers.

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