The flat-rate State Pension – not all it seems?RSS icon

Written by Malcolm Small on Tuesday 28 May 2013

A flurry of announcements from DWP last week confirmed, among other things, that the forthcoming pensions Bill will contain the legislative basis for the move to a flat-rate basic state pension. We have always argued for this and welcome this development, as it will bring to an end the system of means tested retirement income benefits and the fiendishly complex State Second Pension and its forebears. It will also create certainty around state-provided retirement income, providing a clear platform to save further.

However, for anyone who has read the papers supporting the new architecture, it could be argued that we may stand in danger of replacing one complexity with another. A whole new jargon of phrases such as “Foundation Amount” is emerging, with quite complex formulae being required for anyone to work out what their ACTUAL state pension will be – it will still be linked to NI history – and these calculations will be beyond the ability of many, I would suggest.

And a big uncertainty is around the treatment of those with long periods of contracted-out employment. The vital factors for these calculations are, significantly in my view, yet to be disclosed, but there seems little doubt that the intention is that these groups will receive a lower state pension. The argument for this is likely to be that they paid a lower rate of National Insurance when contracted out, which is true. However, they also took their pension liabilities off the government balance sheet to some extent and the rebates towards the end of the scheme were arguably inadequate to compensate for the investment risk being carried. That risk was, and is, considerable, and government will need to be careful not to give the impression that doing the bidding of  past governments of the day in taking the decision to contract out, does not result in a financial “kicking” later.

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