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Government prepares for single state pension, say industry experts


Pensions experts have suggested the Government is flexing its muscles to introduce a flat rate state pension, following its announcement yesterday that amount of state pension money paid out to pensioners can differ by more than £200 a week

Yesterday HR reported on DWP research finding a difference of £10,000 a year between between highest and lowest state pension recipients.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: " This is probably the warm up act before the Government unveils plans to move towards a flat state pension of a little over £140 a week for all.

"The Government is right to point out the current system is horrendously complicated. Consequently building any accurate idea of what you might get from the state is nigh on impossible. By moving to a simple £140 a week the Government can provide everyone with greater certainty over what they will get from the state, allowing them to properly plan what they need from their private retirement savings.

"From 1st October 2012 millions of people will be automatically enrolled into a workplace pension. If the government fails to publish its plans for the state pension by then this long awaited reform could be thwarted by negative publicity, because under the current system lower income workers could end up simply replacing means-tested state benefits with the savings they make.

"Once the plan is announced, we can expect skirmishes on the way to a flat rate state pension as some people stand to lose out as a result of this reform. Middle and high earners would do better under the current system than a flat £140 a week. Public sector workers are also likely to be unhappy as they will be paying an extra 1.4% National Insurance.

"It isn't clear whether the DWP's decision to publish these figures this week are a prelude to the publication of the White paper, or a nudge to Downing Street to get it signed off."

Barnett Waddingham consultant Malcolm McLean added: "We are all excited about the concept of a new simple state pension sweeping away the present convoluted and confusing arrangements which, as the Pensions Minister has so graphically put it, have the capacity to baffle even an Einstein.

"It will, if successful, not only make the state pension more understandable but will also for many more people provide a platform for private pension saving - something which could be of crucial importance as the now imminent programme of auto-enrolment starts to roll out.

"Whilst simplification is the (laudable) name of the game, as ever however, the devil may well be in the detail. The reform is unlikely, initially anyway, to make a dramatic difference to the range of pension rates which DWP has indicated currently vary from as little as £7 a week to as much as £230 a week. This is because on the basis of previous statements there will still be an NI contribution test.

This means that some contributors may fall well short of the 30 qualifying year requirement and thus be entitled to only a proportion of the full rate pension. DWP has also confirmed that those people with accrued rights under the present system which gives them an entitlement to a pension higher than £140 a week - perhaps as much as £230 a week - will continue to receive it in full. So it is difficult to see, in the early years at least, that there will be much difference, as DWP seems to imply, in the range and scope of state pension awards made after the changeover date in 2015 or 2016.

"It will be good to have sight of the White Paper now promised for the Autumn when hopefully all the details of the plans will be fully laid bare."