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State pension reform explained
The coalition has today outlined a new single flat-rate State pension as part of a major shake-up - and simplification - of the current system.
Under the radical proposals in the White Paper, the new pension will be equivalent to around £144 a week, plus inflation rises between now and April 2017 when the changes are set to come into play (for new pensioners reaching State pension age).
At present, the full state pension for a single person is £107.45 a week, but can be topped up to £142.70 with pension credit and the earnings-related second State pension (formerly known as SERPs).
The new single-tier payment has been established by merging the basic State pension with the second State pension; means-tested top-ups will be scrapped.
This is the biggest overhaul of the system for decades. Here, we explain exactly what's changing and what it means for you.
What will this mean for pension savers?
The current State pension has long been criticised for being unfair and too complicated with its maze of credits and means-testing - and long been in need of reform.
Campaigners say a simpler, clearer and fairer State pension is a much-needed shake-up - not least to put a stop to the indignity of means-testing for many older people.
The Government's intention is to give pensioners and savers confidence and certainty over the amount they will get from the State in advance - thereby providing them with an easily-understood base level on which to plan and save for their retirement.
Ministers hope the changes - along with auto-enrolment (which has given millions of people new rights to a pension at work) - will help to rebuild a savings culture by making it easier for all workers to see what they need to save in their new workplace pension.
The key message is that it pays to save, as your pot won't be eroded by means-testing when you retire.
Who are the main winners from the shake-up?
The move is especially good news for women, low-income families, and the self-employed.
In the past, many women have suffered from a damaged pension record, having taken significant career breaks to care for children. However, this will change under the new single tier pension, as more women will be able to receive a full State pension in their own right. The same applies to other types of carer.
The move will also benefit a lot of lower-paid workers who often find themselves without a decent State pension under the current rules.
In addition, the changes will also be good news for self-employed workers who can find it extremely difficult to earn a full State pension under the current system.
Will we have to work longer?
Under the changes, people will have to make National Insurance (NI) contributions for longer in order to get the full amount.
The minimum number of years to qualify for the full State pension will go up from 30 to 35 years; a minimum qualifying period of 10 years is also being introduced.
Prime Minister David Cameron said that as we are all living longer, it is fair to ask people to work a bit longer and retire later.
Joanne Segars from the National Association of Pension Funds (NAPF) says: "The trade-off for working longer must be this better State pension which will also treat women, the low-paid, and the self-employed more fairly."
Who will lose out from the changes?
While some groups have welcomed the changes, not all are convinced about the benefits of the new system.
The Institute of Fiscal Studies warned that while there would be a "bunch of winners in the short run, in the longer run, most people will end up with a lower pension than they might otherwise have thought."
According to adviser Hargreaves Lansdown, several groups stand to lose out from the changes; these include high earners, recent immigrants, and those with less than 10 years' service at retirement.
The National Pensioners Convention (NPC) also raised concerns, dubbing the move little more than a "con trick for future generations".
It warned that the changes would mean individuals having to pay in more, and that the new system would offer them less than they get now, and require people to work longer before they get it back.
What about those who are due to retire between now and 2017?
Pension experts warn that those individuals retiring between now and 2017 are also likely to be worse off as they will receive their entitlement under the current system, and not the new system.
The same is true for those who are already retired. That said, some argue that this is justifiable.
"This is a 'necessary evil' to ensure the State pension continues to meet the needs of an ageing population," says Paul Barry of Duncan Lawrie Private Bank.
What about company final salary pensions?
At present, many workers in both the private and public sector have "opted out" of the second State pension because their final salary schemes pay an equivalent benefit. This means they pay reduced rates of NI.
However, as it will no longer be possible to "contract out" of the second State pension under the new system, several million workers may now have to pay higher NI contributions.
"Firms which still operate a final salary pension scheme may be less likely to continue these schemes once the changes take effect, as they will become more expensive to run," says Barry.
In the public sector, members may well be angered by their increased NI bill, adds Tom McPhail from Hargreaves Lansdown.
"But 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," he says. "Final salary scheme members will be both winners and losers."
What about the planned increases to State pension age?
The planned State pension age rises are still set to go ahead, with the age for both men and women increasing to 66 between 2018 and 2020, and then rising again to 67 by 2026.
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I have worked 30yrs+ my brother 40yrs+ and both of us are still working tho' choice.
I guess we're the suckers. We were told we would be looked after by government.
We have never asked for anything & received nothing.
It's not our fault we're living longer why should we always be the ones to carry the can???
And MP's want 32% rise. Thieving B*****ds.
I have worked just over 50 years and paid in National Health insurance & Income tax, never been out if work or claimed benefits, I retired in March yes I get a pension from my work and the old age pension, whilst at work I had equal opportunities rammed down my throat, it looks like this rabble in power seem to have forgoten this, why are we haveing a two tier pension they tell us that everyone is equal so give everyone the same, means testing is another way for them to grab our hard earned savings. why if I have saved up so I can have a decent standard of living, this will be taken off me if I have to go in to care, stop giving our money to other Countries and immigrants (who have paid nothing in to the UK ), let's get our own house in order before we give the money this Govenment is borrowing to these Countries.
I took out a private pension as well as paying into the government scheme for fifty years to try and have a comfortable retirement.
Result is most of my private pension goes in tax.
Anyone thinking about taking out a private pension should really give more thought as to where they can afford to put their savings , certainly not where the theiving government can get their theiving hands on it.
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