13 January 2013 Last updated at 22:35 ET
A new flat-rate state pension likely to start in April 2017 will be simpler than the current system of means-tested top-ups, the government will argue as it outlines details later.
The weekly payment will be £144 plus inflation rises between now and 2017.
The current full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit.
Plans to introduce legislation were included in the Queen’s Speech, but detailed proposals are now ready.
These have been expected for some time, with the aim of simplifying the system by replacing the means-tested pension credit element.
Overhaul
The flat-rate pension will be paid only to new pensioners reaching state pension age from a date expected to be 6 April, 2017, the government is expected to announce. Millions of existing pensioners, and those who qualify before then, will get their entitlement under the current system.
Under established plans, the state pension age is rising in any case to 66 for both men and women by 2020, with further plans for this to increase to 67 between 2026 and 2028.
A universal flat-rate payment in England, Wales and Scotland would be the biggest overhaul of the system for decades.
More than one-and-a-half million pensioners do not claim the pension credit that they are entitled to, and the government believes that this would not occur under a simpler flat-rate system.
The self-employed are also likely to benefit, as they tend to get a lower state pension.
However, there is likely to be a debate about the fairness of a flat rate that makes no distinction between poor and wealthy pensioners.
The state pension will still rise, as now, in line with earnings, prices, or 2.5%, whichever is higher.
Final-salary pension savers
The government is also expected to announce that anyone who has not paid National Insurance for at least 10 years will not qualify for a state pension. Those who have paid for less than 35 years will see their pension reduced in a change from the 30-year threshold introduced a few years ago.
The government is expected to outline exactly how it would phase out the state second pension which acts as a top-up to the basic state pension.
At the moment, some prospective state pensioners will accrue a higher level of state pension than £144 a week via a combination of their basic and state second pensions.
As the government has promised that all accrued pension rights will be recognised, the new system may have to involve some future pensioners being paid a top-up to the new flat-rate pension. This would recognise the contributions that they have already made for their state second pension.
Several million employees in the private and public sectors are opted out of the state second pension because their final-salary schemes pay an equivalent benefit.
The government will have to decide if these individuals should 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.
A further complication is that members of those pension schemes which are opted out of the state second pension, receive a rebate on their National Insurance contributions. The government must decide if they should start paying higher National Insurance contributions if they are to become eligible for the new flat-rate pension.
Women workers
At the weekend The Daily Telegraph reported that more than six million workers would pay higher NI contributions under the shake-up.
Those affected are expected to include around 1.4 million private sector staff enrolled in final salary schemes and contracted out, said the Telegraph.
The plan would bring “contracting out” arrangements to an end – where some people pay lower National Insurance contributions because their second state pension is contracted out to their company final-salary pension scheme.
As a result, these people’s NI bill would rise, but their state pension would also be greater.
The Telegraph reported another five million public sector workers in similar schemes would also pay higher NI.
The BBC’s Simon Gompertz said someone on an average wage who is affected in this way might have to pay an additional £270 a year.
However, there are also beneficiaries under the scheme.
Chris Curry, from the charity the Pensions Policy Institute, said the people helped were those who have traditionally done very badly under the current system.
“So people who don’t make enough contributions throughout their working life to, in particular, the state second pension,” he said.
“Which includes people with intermittent work patterns, periods of low earnings and the self-employed.
“So a lot of women will do better from this particular policy as will people who are spending long periods of their career in self-employment. “
BBC News – Business
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