The new flat-rate state pension proposal explained

(Update 4th April 2011 - Pension Minister Steve Webb tonight announced more details on the proposed flat-rate pension. Read my article The flat-rate pension proposals in bullet points for the full low-down.)

The UK must have one of the most complex state pension scheme in the world and trying to explain the complexities to someone of retirement age would have them dozing off in the armchair within seconds.

Let me explain - There is a Basic State Pension, a Second State Pension, plus some State Earnings Related Pension, or SERPS, plus the Graduated Pension. All of the above have different qualification criteria and come from contributions in different years. On top of all this pensioners can claim a complicated means-tested Pension Credit to top up any pension to a total of £132 per week, which consists of a Guaranteed Credit and a Savings Credit.

Hello! Are you still there? Ok, it's complicated but life is complicated so why do we need to change?

Why are things changing?

Well, there are two major problems with the current system:

1. It discriminates against women - they receive less state pension than men because although they are credited into the National Insurance system, when they are stay at home mums or working part-time, it's a lower amount than men are credited when they work full-time.
2. Because of its heavy reliance on means-testing it discourages private pension savings as these will simply be negated by a loss in benefits. This will be exacerbated by the auto-enrolment in the new national pension scheme (NEST) where workers will be automatically put in a pension scheme, which may ultimately be of no extra benefit to them.

What are the proposed changes?

Well details are thin on the ground at the moment and we may know more after the Budget on 23 March, but here is what was announced yesterday

• Basic State Pension to rise to £140 or there abouts
• End to mean-testing
• Unlikely to effect those already retired or close to retirement as won’t come into affect until 2015
• Could be linked to a higher retirement age

So what are the major advantages of the changes?

• Simplicity – SERPS, pension credits and S2P will likely be scrapped to fund the changes.
• Improved pension for many, particularly women
• Make NEST more beneficial
• End to means-testing?

Conclusion

At first sight it appears that Santa has returned for pensioners, but obviously it's time to revisit the old clichés about "free lunches" and "if it looks to good to be true" etc. This is not a hand out by the Government by really an attempt to simplify things, make NEST workable and of course raise the retirement age.

Final details of how all this will work in practice (especially with regard to SERPS etc) will likely appear on the Budget on March 23^rd. Pension Minister Steven Webb claimed yesterday that the new system will still be based on NI contributions and credits but years spent years spent looking after children will count towards the new flat-rate state pension

But one thing for sure is that stay at home mum’s will quite rightly benefit under the system but it will almost certainly be at the expense of others. Watch this space