Radical pension reform on the cards

The move is designed to do away with the current complicated pension system which ministers say leaves people confused as to what they are due and forces the Government to waste millions of pounds in administrative costs and means testing.

Ministers declined to comment on the story today which was first mooted in a report in the Daily Mail. But the Pensions Minister Steve Webb has made no secret of his desire to overhaul the system and replace it with a single, universal pension payment, in much the same way as the Government plans to scrap the thirty-odd welfare benefits and replace them with a single one-size-fits-all universal payment.

Winners

Under the proposals, which are due to be published in a Green Paper next month, all retirees would receive a flat payment of £140 a week instead of the current £97.65. The winners would be those with a patchy work history who have not completed the thirty years currently required to be eligible for the full state pension.

In particular, working women who have taken time off from their work life to have children, would benefit. Under the current system, they get penalised for not working the full 30 years, but under the new system they would be entitled to the same level of benefit as everyone else.

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Other winners would include pensioners who currently retire and get the state pension but who are also eligible for additional tax credits but do not claim them – either because they do not know they are entitled to the top up or they want to avoid the embarrassment of being means-tested to see if they are eligible. They too would reap the rewards by getting the new, higher flat rate.

Losers

But with Government coffers tight, the plans to pay people more, not less, pension, immediately begs the question as to how Government plans to pay for it.

Firstly, ministers say that by doing away with the bureaucracy of the current, complicated system, it would save a lot of money which could be put towards the new scheme. But clearly mopping up administrative costs will not be enough. And it is here that the losers of this plan come in.

Currently those people who work more than the thirty years required for a basic state pension get what is called a second state pension. Under the new plans, it seems likely that this second state pension – which costs the Governments billions of pounds each year – will be scrapped and the money put towards paying for the new rate.

Another option could be to bring forward the retirement age whereby you become eligible for a state pension. We already know that the Government plans to move the retirement age to 66 years old, for both men and women. But there are also plans to move it to 67, by 2036, and 68 by 2046. So could Government accelerate the timeframe under which it plans to do that? Given its accelerated timescale for the move to 66, such a plan seems entirely possible.

Simple maths

Whatever the mechanics of the overhaul, the aim remains the same: to encourage people to save more by showing them exactly how much they should expect to get from the Government. If you do the maths, it’s pretty simple.

£140 a week would give you £7,280 to live off in retirement. Not exactly a golden nest egg. So the Government is hoping the changes will encourage people to save more – to join their work pension plan or to set up a separate, private, pension scheme of their own.

Whether or not that actually happens, in these straightened times, remains to be seen. Either way, the changes, if they are introduced, are not due to take effect until 2015 at the earliest.