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April 4, 2011 7:35 pm
Plans for a simpler state pension of about £140 a week in today’s money have been outlined in what Steve Webb, the pensions minister, described as “the biggest shake-up of the state pension system for generations”.
The single pension would be set just above the means-tested pension credit of £137.35, making it clear that it pays to save for old age, and benefiting women and in particular the 3m self-employed people who are excluded from the state second pension.
“We have to send out a clear message that you will be better off in retirement if you save,” Mr Webb said.
The package outlined on Monday also proposed an automatic method of increasing the age at which state pensions will be paid out after 2020, when the pension age is set to rise to 66.
This could be achieved either by a formula that allows for rising life expectancy, by a regular review, or by a combination of the two, according to the green paper.
The consultation document left a string of detailed questions unanswered. But it said the simpler pension could be established by speeding up existing plans to turn the earnings-related state second pension into a flat-rate pension.
Mr Webb’s preferred alternative, which could be introduced more quickly, is a single flat-rate pension of £140 a week.
The £140-a-week deal will apply only to new pensioners. It will still be linked to 30 years of national insurance contributions or credits, and people will have to make contributions for a minimum of seven years to receive anything.
The package will not increase state spending on pensions, Mr Webb said, although the green paper provided no financial illustration of how that would be achieved.
In practice, many people were already in line to receive a pension of about £140 through a combination of the basic state pension, which stands at £102 a week, and entitlements they have either to the state second pension or to the “guaranteed” element they receive through a final salary or defined benefit scheme, or through past entitlements from an opted-out money purchase scheme.
Joanne Segars, chief executive of the National Association of Pension Funds, welcomed the move as “an important step forward, making clear for the first time in a generation that it pays to save. That is really important, given the introduction, starting next year, of automatic enrolment into pensions.”
The single pension would be likely to hasten the end of defined benefit schemes in the private sector, leaving the public sector as the only workplace with widespread provision of a pension linked to salary rather than savings.
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