Will you win or lose if everyone goes on a flat-rate pension?

| September 23, 2012 | 0 Comments

Stephen Womack

16:24 EST, 22 September 2012


09:31 EST, 23 September 2012

Uncertainty hangs over future pensioners after news that the Government may be rethinking its plans to introduce a universal State Pension. Ministers have been working on reforms to introduce a more generous pension, potentially from 2015.

But reports last week suggested the Prime Minister wanted a rethink after fears reform would be unpopular among those who might lose out. What will reform mean, and who will be the winners and losers?

Limbo: Mary and Tony Walsh face uncertainty and just want to know what will happen

Limbo: Mary and Tony Walsh face uncertainty and just want to know what will happen

What has been suggested?

single State Pension for all. This could be worth between £140 and £150
a week. It would replace a confusing mixture of pension payments that
is expensive to administer.

Those already retired would carry on receiving their existing pensions and benefits, but anyone retiring after a certain date, probably in 2015, would collect the new pension.

How does the State Pension  work now?

We just want to know what is going to happen as otherwise we can’t plan

Mary and Tony Walsh are hoping that the picture on their State pension becomes clear sooner rather than later.

A flat-rate pension would be  a mixed blessing. Mary, 58, is likely to see a rise in her overall pension. Many of her years of work, most recently as a council clerk, have been part-time. She has been unable to work through illness in recent years.

But Tony, 60, an engineer for  a kitchen equipment supplier,  could see his State pension fall. As one of those workers with  a full employment history and above-average earnings, he is on track for a bigger additional State pension. Mary says: ‘If reform boosts my pension, it may well  be at the cost of Tony’s.’

Above all, the couple, who live near Dunstable, Bedfordshire, crave certainty. Mary was born in 1954. She has already seen the age when she is entitled to a State Pension drift back from 60 to 65 years and six months. She is concerned this could be put back even further.

‘The Government keeps moving the goalposts and it is difficult  for us to plan with confidence.  I’m unsure what will happen to our income once Tony is retired and I’m not.’

The uncertainty is compounded because Tony has an old works pension from film company Kodak. But the US parent filed for insolvency in January, casting doubt on whether he will get the promised pension in full.

The couple are in the process  of selling their home and downsizing to try to cut bills ahead of retirement.

Today’s pensioners can get four types of State support. The basic pension, worth a maximum of £107.45 a week for a single person, depends on your record of National Insurance payments. Workers have to build up 30 years of NI contributions to qualify for the full pension.

Second, employees can receive additional State pensions based on earnings. The State Second Pension, and its predecessor Serps, can be worth more than £120 a week, though the average is only £24.

Third, the Government pays means-tested Pension Credit for those who have not accumulated enough in their pot. This guarantees a minimum of £142.70 a week for a single pensioner and £217.90 for a couple. But about 1.6 million pensioners miss out because they do not claim. Finally there are payments for winter fuel, cold weather, plus concessions on travel and health and TV licences.

Why is change needed?

The complex system means huge variations in pensions paid. Some people receive as little as £7 a week while others get more than £230.

Many part-time workers miss out, as do carers. The self-employed get a raw deal because they are excluded from the additional earnings-related pensions. Those who miss out are forced into the indignity of claiming means-tested benefits.

The Government had promised a White Paper setting out its blueprint for change, but this has already been postponed once. There are now concerns any proposals that do emerge later this year will still not be the  finished article.

Michelle Mitchell, charity director general at Age UK, says: ‘A single-tier State Pension set above the basic Pension Credit rate would be fairer and simpler than the current complex system of means-testing and payments. We urge the Government to stick to its commitment and bring forward a White Paper and Bill this parliamentary session.’

Who are the likely winners?

Women would be the big winners in any reform. Time spent caring for either children or older relatives can leave many struggling to build up entitlement to a full pension.

Under the reforms, a woman would be entitled to a pension in her own right, rather than depending on a husband’s pension record for a decent income.

Laith Khalaf of financial adviser Hargreaves Lansdown in Bristol says: ‘The self-employed, who cannot join the State Second Pension, could also be big gainers.

They might see a bih increase in retirement incomes.’

And the potential losers?

Those with a full working career who because of their earnings might be expecting to retire on a State Pension worth up to £230 a week. These incomes would be cut under the universal pension. About 1.5 million of today’s pensioners are already getting more than £150 a week in State pension. So one in seven future pensioners might see their income reduced.

And today’s workers in final salary pensions could be asked to pay an extra 1.4 per cent in NI contributions because a move to flat-rate pensions would also see the end of contracting out from the State Second Pension.

What might be the impact of  any delay?

First, people will continue to retire on an inadequate State pension and be dragged into claiming top-up benefits. Second, there could be knock-on effects for workers who are automatically signed up to company pensions under new rules starting next month.

Some older workers, with no history of pension savings, could find their pay today reduces but the modest pensions they earn in return simply mean they receive lower benefits in future.

The comments below have not been moderated.

Who thinks it is just 30 years of paying taxes? You will still be paying NI in years 31,32,33 until 68 or later rather than the old 60 years of just a few years ago…..As for benefits this was extended under Churchill as a way to keep wages low for company owners. They could pay a family man the same wage as a single person.


London, United Kingdom,
23/9/2012 14:17

The principle of the flat-rate pension is sound, but the proposed time scale is not. Pensions require long term planning, so the Government should be looking at introducing it in, say, 2035 instead of 2015. 20 years notice would give people more time to plan for this. And before anyone starts flinging the red arrows, I’m 56 so I’d be ruling myself out of receiving the higher pension as well!


Small town, United Kingdom,
23/9/2012 14:05

By the time the £140 a week pension gets implemented, it will be in real terms worth £80 in today’s money, meaning you get nothing extra that what you already have today.


23/9/2012 14:02

It all seems wrong to me that someone who has made only 30 years of NI contributions can get the same, if not more, than someone who has contributed for more than 45 years to NI. What other financial product, or savings plan, gives those who have paid 50% less into a scheme receive the same as those who have paid at least 50% more?.


London SW,
23/9/2012 12:35

Do not rely on any government to provide you with a pension when you retire.

frankie mcgill

23/9/2012 12:34

I love how they call it pension CREDIT, child tax CREDIT, working tax CREDIT as if its not some handout for the peasants.


23/9/2012 11:30

If this goes ahead it will be an absolute disgrace to those who have worked all of their lives and payed into the “system”. I am so angry at the way a particular age group in our country has been deliberately targeted to achieve the maximum take back for the government. Politicians….shove em!

Kev E

Scotland, United Kingdom,
23/9/2012 11:08

Every thing is not fair for every one . some women retiring at 60 and now 65 and in the future every one retiring at 66 or 67 and for sure 70 in time .A flat rate pension would be a better way forward at least people would know what to expect in retirement . Also a tax alowance of say £12000 so people on a low incomes who have saved and invested in pension schemes wouldnt have to pay tax so they would benifit from saving and people who havnt worked and saved would just get the flat rate .


lincoln, United Kingdom,
23/9/2012 10:45

Before this change was proposed – it should have mapped out exactly how the old Pension Credit (a passport benefit) would be integrated in to the new flat rate scheme. At present those eligible for Pension Credit are also potentially eligible for Council Tax Benefit/Housing Benefit – with HB worth up to £400 weekly, and CTB a further £60 odd weekly. It would seem that HB/CTB claimants will still need to be means tested on new system, though it does give non PC claimants the benefit automatically. In the bigger picture though – the underlying mortality improvements have been known about for decades – and State Pension age should have been gradually adjusted over at least the past 30 years – thereby avoiding the “cliff edge” scenario for women especially – thus enabling people to plan over a longer period for a possibly later retirement. With average marriage duration only 11 years – many females will have initially been relying on husbands’ pensions, so may benefit from new system.


23/9/2012 09:33

Another thing I won’t be entitled to after 50 yrs of working, paying taxes and not claiming any benefits.To not pay it to ALL pensioners is a guaranteed large number of votes loser, they may as well throw in the towel now and go There’s so much unfairness in our country and it’s always those who deserve the least who get the most.

Aggrieved pensioner

23/9/2012 09:21

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