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Government Ministers are drawing up plans to replace the existing means-tested and contribution-based system with a new flat-rate pension to replace the current basic state pension, the second state pension and pension credits.

The proposals are that from 2015 every person will be entitled to a pension of £140 a week. This is a significant increase on the existing basic state pension of £97.65 a week for a single person and £156.15 for a couple. Currently means-tested top-ups are available to ensure the poorest single pensioners have an income of at least £132.60 and couples get £202.40.

The present system is based on an individual’s record of paying or being exempted from National Insurance Contributions (NIC). Typical exemptions are available for periods of illness, unemployment and time out of work to bring up a family. Individuals who do not pay or have credited NICs for a period of about 40 years only get a reduced pension.

This system is complicated to keep track of and it is common for payment records to miss NIC payments leading to delay and stress, not to mention cost, in sorting things out. Ministers believe that scrapping this present complicated and expensive system will save enough money from reduced bureaucracy to pay for the new pension and that the move would benefit everybody in retirement, including the better off.

It seems the new system would probably be based on residency in Britain and not on National Insurance contributions however this is one area where detailed consultation is going to be needed. Currently there is a system of reciprocal credit for people working in countries that they may not be resident or nationals of when they retire. This is true of most European countries and many others. So it is possible that NIC records may still have to be kept even if, as is suggested, the right to a UK pension will no longer be reliant on a payment record.

In due course this change could also encourage people to invest more in their own pension arrangements. Currently the system of means-tested retirement benefits acts as a disincentive for modest earners to save in a pension as any private pension they have from their own savings reduces the means-tested top-up payments.

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Category: UK Personal Taxes

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