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Flat-rate state pension set to be introduced in 2017

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Details of a flat-rate state pension of £144 a week introduced in 2017 are set to be unveiled today.

The flat-rate pension will be paid only to new pensioners reaching state pension age from a date expected to be April, 2017, the Government is expected to announce. Millions of existing pensioners, and those who qualify before then, will get their entitlement under the current system.

The minimum number of years a person will have to pay national nnsurance (NI) in order to receive the full state pension payment will rise from 30 to 35 years.

The full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit.

According to the Daily Telegraph, 'millions' more workers will have to contribute more in national insurance to pay for it, which will amount to an effective tax rise of 1.4p in the pound.

It states that those affected include 1.4 million workers in the private sector who are enrolled in final salary schemes and five million in the public sector who have 'contracted out' of the state second pension and currently pay a lower rate of national insurance.

The plan would bring "contracting out" arrangements to an end - where some people pay lower NI contributions because their second state pension is contracted out to their company final-salary pension scheme.

As a result, these people's NI bill would rise, but their state pension would also be greater.

The Daily Telegraph reported another five million public sector workers in similar schemes would also pay higher NI.

More than one-and-a-half million pensioners do not claim the pension credit that they are entitled to, and the government believes that this would not occur under a simpler flat-rate system.

Independent financial service provider, Hargreaves Lansdown, has outlined the 'winners and losers' from the proposed changes:

The self-employed - winners

The self-employed can only receive a maximum state pension of £107.45 per week. This will increase from 2017 to £144 per week for those who have 35 or more qualifying years.

Those who have combined basic and second tier pensions of less than £144 - winners

They will benefit from an increase to £144 per week.

Younger people who have already accrued some contracted out service - winners

Those who have contracted out yet still have sufficient time to build up further basic state pension will potentially benefit from the new £144 per week pension plus their contracted out monies.

Those with less than 10 years' service at retirement - losers

Currently state pension is accrued on a year by year basis. However, 10 years will now be the minimum qualifying period of service.

Recent immigrants - losers

Anyone recently arrived in this country who isn't able to build up 10 years' worth of NI contributions before state retirement age will not get a state pension.

High earners - losers

Under the present system a high earner might have accrued a state pension in excess of £144 a week; in theory up to a maximum of £250 per week.

This will now be reduced to £144 per week (although benefits accrued to 2017 are retained).

State pension age rises - losers

Individuals will lose out by receiving their state pension later and will have to defer retirement or live on other resources. This will be particularly relevant to people in their 20s and 30s.

Final salary scheme members - winners and losers

Following the abolition of contracting out, both employee and employer National Insurance contributions will rise. In the private sector this may precipitate a further wave of scheme closures.

In the public sector, members may well be angered by their increased NI bill, however given that they will then be building up a more generous state pension and still getting their defined benefit public sector pension, they are actually going to do quite well from these reforms.

At present, employees and employers who are members of contracted our final salary pension scheme pay reduced rates of national insurance. When contracted out is abolished, their national insurance contributions will rise.

This could cost someone in a final salary pension scheme earning £25,000 a year an extra £270 a year national insurance.

Tom McPhail, head of pensions research, Hargreaves Lansdown, said: "This vital reform lays the foundation to rebuild the UK's retirement savings. It will simplify the state pension for millions of today's workers, allowing them to plan their retirement with more certainty.

"Anyone retiring before the reforms are implemented in 2017 may wonder why they are missing out on the £144 a week pension."

McPhail added: "Public sector workers will probably be angered by their increase in National Insurance rate; in fact they will do quite well from the reforms.

"We will almost certainly see another wave of private sector final salary scheme closures in response to the abolition of contracting out.

"Low earners and the self-employed will potentially be the big beneficiaries from the new more generous basic state pension," he said.

Brian Strutton, national officer of trade union, GMB, said a new flat rate pension should be fairer than the present arrangements, but warned of a "very serious consequence" from the Coalition's plans.

He said: "That is the increase in National Insurance contributions that employers and employees in defined benefit pension schemes will have to pay.

"For employers that is 3.4% of the NI ranking earnings and for the six million employees affected it will be an extra 1.4%. Most DB scheme employers and members will find this unaffordable so will need to renegotiate their schemes.

Strutton added: "A good example is the Local Government Pension Scheme which has just been reformed by unions and government and would face an unaffordable extra NI bill of several hundred million pounds. Just as the Treasury legislation to reform public sector pensions is going through parliament, the Department for Work and Pensions (DWP) is proposing to blow it all out of the water by completely rewriting the state and occupational pension landscape."