The winners and losers from a flat-rate pension system

Future pensioners will now receive a slightly smaller share of national income. Photo: Dominic Lipinski/PA Wire

When the new flat-rate pension begins later this decade it will be worth the equivalent of £144 in today's money.

That is the proposal in a White Paper being outlined today. The new weekly pension rate will replace the current three-pronged arrangement of basic state pension, second state pension and means-tested pension credit.

The rate has been set above the means test floor. Right now you are entitled to extra help if you earn less than £142.70 per week. The second state pension (formerly known as SERPS) will be scrapped.

The new flat rate will not start before April 2017. Anyone who has paid 35 years of National Insurance contributions will be entitled to the full rate. A worker will fewer than 10 years' NI contributions will receive no pension at all. Above 10 years NI payments, workers will accrue the state pension at 1/35 per year (currently £4.11 for each year of payments).

A parent who takes time out of work to look after children will qualify for National Insurance credits so they will still be entitled to the full single tier pension. But they must claim or have claimed child benefit to qualify for the credit, even if they no longer receive it because their partner earns £60,000 or more. A new parent should still file a new claim for child benefit even if they know they earn too much to be entitled to a payment.

So who are the winners and losers?

  • Current pensioners and anyone due to retire before 2017 will continue to receive their pension under the old system.
  • High earners who have paid large sums into their second state pension will now receive just the flat-rate pension.
  • Six to seven million workers - many of them in the public sector - who belong to workplace schemes which have contracted out from the second state pension in return for lower National Insurance contributions will now be contracted back in. They'll have to pay 1.4% higher NI contributions.
  • Similarly, employers - like the NHS - will also have to pay 3.4% higher National Insurance.

Ministers insist the scheme will cost the same as now - but over time it will account for a slightly smaller share of national income than would have been the case under the current arrangements.

The White Paper will also propose a regular review of the state pension age. The Government has already announced it will rise to 66 in 2020 and to 67 by 2028. There will be no further anouncements during this Parliament - but once every five years, ministers say, there should be a review to ensure the proportion spent in work and retirement remains broadly the same as we all continue to live longer.

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