Shake-up aims to take grey areas out of retirement plans

Everyone wants to stop working early enough to actually be able to enjoy retirement, but with talk of pensions yawn-inducing, it’s a subject that often gets pushed to the bottom of the things to do list.

With most generous final-salary pensions schemes having been axed and their replacements offering just a fraction of the benefits, retirement plans have become the elephant in the room.

However, the Government has a plan up its sleeve which it hopes will force us to give more than just a passing thought to our pension plans or, at the very least, distract us from the seemingly endless announcements of public spending cuts.

It was left to the Work and Pensions Secretary Iain Duncan Smith to break the good news. In a speech to Age UK yesterday a little more flesh was put on the bones of the new scheme which he said would be simpler, benefit far more people and encourage even those on low earnings to save for retirement. So far so good, but with the devil as ever in the detail, what does it all mean?

How does the state pension scheme work at the moment?

Currently women aged 60 and men aged 65 qualify for the state pension, which is made up of a flat rate payment plus an additional means-tested top-up.

What changes is the Government planning to make?

The proposal is to replace the current basic state pension and the mean- tested top-ups, like the Pension Credit and Minimum Income Guarantee, with a single, flat rate payment. Single people who currently receive the full state pension and the extra top-up get £132.60 a week. Under the new system everyone would receive £140 a week. The new system will also no longer penalise women who take time out of work to look after children. Currently people need to have paid National Insurance contributions for 30 years in order to qualify for the full basic state pension.

What is the reason for the overhaul?

With the various different payments calculated on age, savings and the amount of National Insurance Contributions which have been made the current system involves a lot of paperwork and has become increasingly bureaucratic.

The state pension system needs to be simplified ahead of plans for workers to be automatically enrolled into their company pension scheme, which start being rolled out next year and the Government also hopes that it will encourage younger workers who have become increasingly cynical about saving to start thinking about their future finances.

Who is going to benefit most?

The biggest winners are likely to be women, who often take career breaks to look after young children. Under the current system only 70 per cent of women have built up the necessary National Insurance contributions to qualify for a full state pension compared to 90 per cent of men. The Government’s plans would protect the pensions of women when they start a family. People who would qualify for means- tested benefit under the current system could also be better off. There is evidence to suggest that at the moment up to 1.6m eligible for extra money are not receiving it. Part of the problem is the process is too complicated and many have admitted they are uncomfortable with the idea of receiving an extra handout. The hope is that it will make retirement planning easier for everyone.

What will happen to people already drawing their state pension?

The changes, which are likely to be outlined in greater detail in the Budget later this month, are aimed at the next generation of pensioners and those who have already retired will not be affected.

What are the criticisms of the Government’s plans?

Some fear the removal of the means-tested element of the state pension will effectively allow a millionaire with a portfolio of investments to claim the same amount as someone who lives on the poverty line. While on paper it seems the basic payment would rise, it is not clear whether the £140 will be adjusted to take into account any increase in inflation and the cost of living when the new scheme is introduced. Opposition MPs have also seized the opportunity to point out that while a simplification of the system is welcome, today’s pensioners have already been hit in the pocket by the increase in VAT and higher fuel prices, and suspect that any rise in pension payments will be negated by cutbacks elsewhere.

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