Flat rate pension penalises hard workers


Budget on TVAndrew Milligan/PA Wire/Press Association Images

George Osborne confirmed that despite all the rumours, the government would be pressing ahead with a move to a flat-rate state pension of £140.

But while there was general applause for simplification and clarity, there has been growing unease - with the revelation that this means hard-working people may be penalised under the new system.


Let's not forget that broadly the new system is a huge stride forwards. Glyn Bradley, Associate in Mercer's Retirement Business in the UK said: "This is unarguably going to be a simpler system than we have had in the past, and much easier for most people to understand. People need to take responsibility for their own retirement provision if they can, but they need a strong foundation to build on. We welcome the fact that this reform will help people understand what they can expect from the state and give them more confidence that their own savings won't be means-tested away."

Under the new system, as long as you have worked for 30 years - or taken time out specifically to care for children - you will receive the £140 a week pension. If you have had periods of adult study, or out of work, this will undoubtedly leave you better off.

Hard-working suffer

However, hard-working people who have never spent a day out of work could end up worse off in two clear ways.

First, and most significantly, what they make under the new system could be less than what they would have received under the State Second Pension (S2P) and Serps, which top up the current basic pension of £102.50 a week. The top up pensions apply to anyone who makes over £5,304 a year. You get additional payments for every year you earn over this level - up to a maximum state pension of £250 a week.

Someone who has worked hard and for decades to build up this entitlement, may be in for a nasty surprise, as their state pension is set to be £110 a week less under the new system. It makes a mockery of the government's promise it would make hard work pay.

Dr Deborah Cooper, Partner at Mercer, explains: "£140 per week is a better prospect for those who would have struggled to pay in sufficient NI, but most people who worked throughout their careers and paid in their taxes could have expected to build up more."

However, it's worth pointing out that we have some way to go before this new system is brought in, so there is time yet for extra rules to be announced for these people. It may be, for example, that you get to keep those entitlements you have built up so far.

Final-salary blow

The second blow will be for those in final salary pension. Bradley warns: "The reform will kick away the final support the government has been giving to those employers still providing defined benefit schemes. This is because, since 'contracting-out' of the additional state pension was introduced in 1978, employers and their employees have paid lower rates of national insurance ('NI') in return for good quality occupational schemes. Sweeping this away will raise the NI bills of those employers, which will make them think twice about keeping their schemes open."

Tom McPhail head of pensions research for Hargreaves Lansdown adds that there will be pain felt by public sector pensioners too. He explains: "In order to deliver the reform, contracting out for final salary schemes will have to be scrapped. This in turn will lead to an increase in National Insurance rates of 1.4% for members of contracted out occupational pension schemes, the vast majority of whom are employed in the public sector."

Trouble for us all

This, in turn, could lead to more unrest affecting everyone. He points out that it "heralds the next major battle between the Treasury and public sector unions," which has a tendency to affect the whole country if the sides become militant.

There's more detail expected later this spring, so all hard-working people can do is keep their fingers crossed.

But what do you think. Do you support the idea of the flat rate pension, or will you lose out? Let us know in the comments.

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