State pension: The overhaul and you

By Kevin Peachey Personal finance reporter, BBC News

 

The state pension has seen significant changes since this man collected it in 1909

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When the state pension was introduced in 1909, the maximum payment was five shillings (25p) a week - the equivalent of about £20 today.

Just over 500,000 old and poor people queued up to receive it. They had to be at least 70 years old, have an income of less than 12 shillings a week and not have too much furniture, which was judged as a sign of wealth.



Now, the government has published a White Paper and a draft Pensions Bill, outlining its 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 2016 at the earliest.
So how will this change the current system and how will it affect you?

How is the state pension run at the moment?

Those who qualify for a state pension currently start to receive payments in their 60s. The exact age is being equalised for men and women. It is rising to 66 for both sexes by 2020, then to 67 by 2028.
People can look at a state pension calculator to find the age at which they will receive it. The government is planning a five-year review of the state pension age from the next Parliament.
The most somebody can get in state pension at the moment is £107.45 a week.
It then gets more complicated, because some people also receive the State Second Pension, or Serps, which is the government's earnings-related additional pension.
And there is also an additional means test that tops up the pensions of 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.

But is it correct that not everyone gets these payments?

Yes. Your state pension depends on how long you have worked and the number of National Insurance qualifying years you have.
If you reached the state pension age on or after 6 April 2010, you need to have 30 qualifying years for a full basic state pension.
If you reached the pension age before April 2010, then a woman normally needed 39 qualifying years, and a man needed 44 qualifying years during a regular working life to get the full state pension.
If you are in a couple, and only one person in a couple qualifies for the basic state pension, then you can still receive top-up state pension payments of up to £64.40 a week by using one partner's National Insurance record.
Currently, those aged 80 and over who do not qualify for a basic state pension because of an incomplete National Insurance record, can get a smaller pension as long as they fulfil factors such as residency requirements.

 

 

 Pensions can be very complicated to administer and to understand

There seems to be quite a lot of paperwork there?

And there is more. The means test actually puts some people off the top-up they are entitled to.
An estimated 1.5 million people could claim the extra money through Pension Credit but are not doing so.
The government says this is all too complicated. It wants to make the system simpler - but it still will not be simple.

What do the latest proposals say?

The government has outlined proposals for a major overhaul of the system.
This aims to simplify the system by getting rid of all the means-tested sections entirely, for all those retiring from April 2016.


It plans to give a universal payment - 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 2016 will not be affected.

Who wins, if these changes happen?

Those who have built up quite big savings for their retirement could be better off. This is because these savings are considered, at present, in the means testing for Pension Credit.
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.


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.


The flat rate of £144 per week per person at today's prices means that the actual level of payment will be higher than £144 and will depend on the level of inflation between now and then.
The government will want to get implementation right, to prevent confusion during the transfer between the current system and the new one.

Who loses and which aspects could prove controversial?

The timing will be significant.
For example, 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.


There is also likely to be much discussion on whether a millionaire getting the same state pension as somebody on the breadline is fair or not, although this income would be taxed.
And, on a more technical point, some people on a workplace final-salary scheme pay less National Insurance (NI) because their state second pension is "contracted out".


They will receive a reduced version of the flat-rate pension to acknowledge the fact that they have not been contributing to the state second pension in the preceding years.
Anyone who has not paid NI for at least seven, or possibly even 10, years in total in their working life will not qualify for the new single-tier state pension at all.