The Single Tier Pension

 

Publicity has been given to the fact that the government is introducing a single tier national insurance pension.  The amount for each individual will be about £144 a week. Sounds good until you realise that some people might have got £200 per week under the old system.

Here is how the current system works.  Everyone who has worked for 30 years (soon to be 35) gets the basic state retirement pension based on their contributions, currently just over £100 per week.  But unless you are “contracted out”   you will also have contributed through your national insurance contributions to a state second pension.  People who are in good final salary pension schemes are contracted out by their employer and other people have contracted out by taking out private pensions, although this is not allowed since last year.  Over a lifetime of work some people earning good wages but who were not contracted out, could build up entitlement to almost a further £100 of pension, although of course some people got less.

Consultancy service Hyams Robertson have done an in depth analysis of who wins and who loses from the replacement of this system by a flat rate national insurance pension of £144 per person (at today’s values)

The issue is complicated because we also have means tested benefits, funded by general taxation, like pension guarantee credit and universal credit.  Under these benefits your income is compared with what the government thinks you need and you get the difference if what you need is less than what you have.  Currently a single pensioner would get £143 per week plus their housing costs such as rent or mortgage interest (if any) The rate for a couple is £218 plus housing costs  So under the old and new schemes some people will be on pension guarantee credit anyway and will be no better or worse off.

Hyams Roberts calculated that a single person with earnings of just £10,000 per year at today’s values, who works for 50 years, contributing to the state system would have got  a pension of £192.45 at todays values under the old system  Under the new system they get just £144

http://cdn.hm-treasury.gov.uk/budget2013_complete.pdf

In summary the government has made sure that

1)    Lots of people who do not have a company or private pension but who have been saving through the state scheme will be up to £50 per week worse off than they would have been when they retire.

2)    Some people will get more state national insurance pension, but in most cases this will state pension credit going down by the same amount.

3) Where there is a good public sector scheme both employees and employers will have to pay more to the state scheme.  This will lead to reductions in or closure of final salary pension schemes. The government is to allow employers to overrule pension scheme trustees in order to make the pension scheme meaner

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