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State pension: The overhaul and you State pension: The overhaul and you
(40 minutes later)
By Kevin Peachey Personal finance reporter, BBC NewsBy Kevin Peachey Personal finance reporter, BBC News
When the state pension was introduced in 1909, the maximum payment was five shillings (25p) a week - the equivalent of about £20 today.When the state pension was introduced in 1909, the maximum payment was five shillings (25p) a week - the equivalent of about £20 today.
Just over 500,000 old and poor people queued up to receive it. They had to be at least 70 years old, have an income of less than 12 shillings a week and not have too much furniture, which was judged as a sign of wealth.Just over 500,000 old and poor people queued up to receive it. They had to be at least 70 years old, have an income of less than 12 shillings a week and not have too much furniture, which was judged as a sign of wealth.
Now, Work and Pensions Secretary Iain Duncan Smith has given the strongest indication so far of a major overhaul of the state pension, so everyone of state pension age gets the same amount each - some £140 a week, according to newspaper reports. Now, the government has formally unveiled plans to overhaul the state pension system. The same amount - of £140 a week at today's prices - will be paid to every qualifying new pensioner.
So how would this change the current system and how would it affect you?So how would this change the current system and how would it affect you?
How is the state pension run at the moment?How is the state pension run at the moment?
Those who qualify for a state pension currently start to receive payments at 60 for women and 65 for men. Those who qualify for a state pension currently start to receive payments at 60 for women and 65 for men. This is rising to 66 for both sexes by 2020.
The full rate for a single person is £97.65 a week.The full rate for a single person is £97.65 a week.
However, there is also an additional means-test which tops up the pensions of the less wealthy. However, there is also an additional means-test that tops up the pensions of the less wealthy.
This additional amount is called the Pension Credit, or Minimum Income Guarantee, for those in Britain. Those who qualify are guaranteed a weekly minimum £132.60 for a single person and £202.40 for couples.This additional amount is called the Pension Credit, or Minimum Income Guarantee, for those in Britain. Those who qualify are guaranteed a weekly minimum £132.60 for a single person and £202.40 for couples.
But is it correct that not everyone gets these payments?But is it correct that not everyone gets these payments?
Yes. Your state pension depends on how long you have worked and the number of National Insurance qualifying years you have.Yes. Your state pension depends on how long you have worked and the number of National Insurance qualifying years you have.
If you reached the state pension age on or after 6 April 2010, you need to have 30 qualifying years for a full basic state pension.If you reached the state pension age on or after 6 April 2010, you need to have 30 qualifying years for a full basic state pension.
If you reached the pension age before April 2010, then a woman with a working life of 44 years needs 39 qualifying years for a full pension, and a man with a working life of 49 years needs 44 qualifying years to get the full amount. If you reached the pension age before April 2010, then a woman normally needed 39 qualifying years, and a man needed 44 qualifying years during a regular working life to get the full state pension.
If you are in a couple, and only one person in a couple qualifies for the basic state pension, then many couples will still receive state pension payments of up to £156.15 a week between them by using one partner's National Insurance record.If you are in a couple, and only one person in a couple qualifies for the basic state pension, then many couples will still receive state pension payments of up to £156.15 a week between them by using one partner's National Insurance record.
Currently, those aged 80 and over, who do not qualify for a basic state pension, get a non-contributory pension of £58.50 a week as long as they fulfil factors such as residency requirements.Currently, those aged 80 and over, who do not qualify for a basic state pension, get a non-contributory pension of £58.50 a week as long as they fulfil factors such as residency requirements.
There seems to be quite a lot of paperwork there?There seems to be quite a lot of paperwork there?
And there is more. The means-test actually puts some people off the top-up they are entitled to.And there is more. The means-test actually puts some people off the top-up they are entitled to.
Some 1.6 million people could claim the extra money through Pension Credit but are not receiving it, according to estimates. An estimated 1.6 million people could claim the extra money through Pension Credit but are not doing so.
Others also receive the State Second Pension - or Serps - which is the government's earnings-related additional pension. Others also receive the State Second Pension, or Serps, which is the government's earnings-related additional pension.
What do we know of the latest proposals? What do we know about the latest proposals?
Not a huge amount at the moment. However, we do know that there is a discussion paper, drawn up by Pensions Minister Steve Webb, and Iain Duncan Smith is expected to throw his weight behind some of the ideas in a speech later. A green paper has been published by the government outlining plans for a major overhaul of the system.
This aims to simplify the system by getting rid of all the means-tested sections entirely and instead to pay a flat rate to everyone. This aims to simplify the system by getting rid of all the means-tested sections entirely.
Clearly this would save money in terms of bureaucracy, allowing a bigger standardised payment. The green paper outlines two options. The first would keep the current basic state pension of £97, and then add a state second pension of £1.60 a week for every year of National Insurance contributions.
But the big driver is the greater opportunity it offers those who have stopped work to look after children - usually women - who have not built up enough National Insurance qualifying years under the current system. The second would replace the system entirely with a universal payment of £140 a week, at today's prices, for all those who reach state pension age and have 30 years of National Insurance contributions.
Who else wins, if these changes happen? Clearly this would save money in terms of bureaucracy.
As well as women, those who have built up quite big savings for their retirement could be better off. Who wins, if these changes happen?
This is because these savings are considered, at present, in the means-testing for Pension Credit. Many women, who traditionally have received a low basic pension owing to old National Insurance rules penalising them for leaving work to bring up young children. They were helped by changes to these rules made by the previous government.
However, without more detail on the figures - especially on how this could be afforded - we cannot be sure whether everyone will be better off. Those who have built up quite big savings for their retirement could be better off. This is because these savings are considered, at present, in the means-testing for Pension Credit.
Certainly, the reported plan for a basic state pension of £140 would push up many people's income - but we do not know if that is £140 at today's prices, or when such a plan might be implemented some time after 2015. The self-employed, who have received relatively small state pensions because of National Insurance rules, could also benefit.
There would be much discussion on whether a millionaire getting the same state pension as somebody on the breadline is fair or not, although this income would be taxed. Pensions Minister Steve Webb says the change will be cost neutral - with no extra money for new pensioners.
Implementation would also be key, to prevent serious confusion during the transfer between the current system and the new one. The flat-rate of £140 per week per person at today's prices would reach £155 a week if the system were implemented by 2015 or 2016, although an exact target date has not been set. However, this system would only operate for new, not existing, pensioners.
Bear in mind too that the state pension age is rising to 66 for men and women by 2020. The amount would rise, as now, in line with earnings, prices, or 2.5%; whichever is higher.
Has there been much reaction to the plans? Implementation will be key, to prevent confusion during the transfer between the current system and the new one.
Labour has said that people get a similar amount already by qualifying for Pension Credit. Which aspects could prove controversial?
It said the discussion masked the fact that many pensioners would be hit by the fall-out from the Spending Review and the impending rise in VAT to 20% in January. The timing will be significant.
The National Association of Pension Funds (NAPF) describes the UK's state pension as the "worst in Europe", and says it would welcome simplification and less bureaucracy. The coalition government's plan is similar to one which has been promoted by the NAPF. For example, existing pensioners will remain in the old system, so it is unclear whether they would be better or worse off than new pensioners. There would be some anger if it became a two-tier system.
There would also be much discussion on whether a millionaire getting the same state pension as somebody on the breadline is fair or not, although this income would be taxed.
And, on a more technical point, some people on a workplace final-salary scheme pay less National Insurance (NI) because their state second pension is "contracted out". Their NI contributions will need to rise during their working years, but their state pension at the end of it will rise too.
There is also a sting in the tail of the green paper.
It opens discussion about an automatic link between the state pension age and life expectancy.
A formula, or a regular review, could calculate future increases in the state pension age.