New flat rate state pension set to be

13th January 2013

The Government is finally to publish its detailed plans for significantly upgrading but also simultaneously 'flattening' the state pension system.

As a result the basic state pension will increase to around £144 for most people after 2017 though not for those reaching state pension age until then.

The details are to be fully published on the morning of Monday the 14th January. At that stage it will become much easier to work out a full winners and losers and indeed the in-betweeners list, but it will have implications for many millions of people and is sure to be one of the most significant pieces of legislation of the Coalition’s time in office.

The key to this will be calculating just much entitlement you have already built up through the state second pension – the earnings related part of the pension or in other words – the part the system due to be ‘flattened’ out.

It is also likely that the better off who have accrued a lot of potential state second pension entitlement may lose out when the final calculations are made.

It is thought likely that it will hasten the closure of many defined benefit pensions – those that are still on offer – by ending contracting out thus diminishing a source of funding for this type of scheme. The move is expected to accelerate things, and the the demise of most of these schemes was probably inevitable the Government is sure to take some flak.

On the whole, an upgrade will be better for most people in work who have paid National Insurance contributions for a reasonable number of years. It should also benefit the self employed who are likely to be offered more cost-effective ways to secure their entitlement.

The theory and the rationale behind the reform is that it will make it much more beneficial to save and invest i.e. a flatter state pension and a system involving less means-testing should mean the thrifty are rewarded much more for saving in future than they are at present. It is likely the move will therefore see the end of means-testing surrounding the pension credit. At the moment, this can uplift the effective value of the state pension from £107.45 to closer to the new rate.

That could also have a big and arguably beneficial impact on the workplace pension reforms in that it should become more worthwhile to not opt out.

One note of warning though is that in other parts of what we probably now have to call the tax, tax credit and benefits system, we are witnessing more pressure to introduce means-testing and targetting and not less, so at this stage it is difficult to see if the effect of all these policy changes is really to bring about a new pro-savings environment.

We suspect there will be a lot of pain felt by some, though for now the Government must be hoping this is a minority and that the financial pain isn’t too much. And it won’t hit home yet. But whether you are a winner or a loser, MIndful Money will bring you the full analysis and all the expert comment that emerges later this week.


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