Updated: Mon, 14 Jan 2013 16:03:35 GMT | By Esther Shaw, writing for MSN Money

State pension reform explained

We explain exactly what's changing and what it means for you.

Image © AP

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.

14/01/2013 17:18
I am about to retire after contributing for 40 years.... I will ONLY receive £107 and will not get the new rate like some colleagues, who will have only contributed 30 or 35 years on their retirement in 2017 who will get £144...how is that fair?  Surely ALL pensioners should get the new rate.. so none of us have to apply or Pension Credit...or do we lose the right to apply for that too??
14/01/2013 17:52

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.

14/01/2013 17:04
The Final salary pension will probably vanish for all except -  guess who? The MPs of course. After all we are paying for it.
14/01/2013 17:31
I dont suppose the gov would pay back the millions taken from people putting in 43 years and more, would they, the Gov already steals that, and yet someone can come over here work a few years, retire and live of everyone else's pension money, that was payed in and then nicked by the gov, Its the sames as the gov nicks half a persons pension when they die as their Dependants only get half of a persons pension, and the other half gets stolen by the Gov.
14/01/2013 18:48

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.

14/01/2013 18:40
thank you CMD, when I retire in 2016 after working 45 years, what will i get? just about bugger all, you tax us to the hilt with direct and indirect taxes, stealth taxes  and any other taxes that take your fancy, you, tony Blair and Gordon Brown have done all you can to relegate the working man to a third rate citizen, while your friends in banking who brought this country to its needs are still being rewarded with huge bonuses and golden handshakes most of us could only dream of, and to capit all MP's want a pay rise of £32k PA. for what? unqualified people thinking they deserve such rewards?and of course that would boost their pensions 1/40th of their salary for each year in parliament, thought public sector pay was frozen? MP's should be treated the same.

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.


14/01/2013 18:31
it is absolutely normal for MPs to ensure they are well taken care of. It is absolutely normal for pensioners to be undervalued and ignored. What's new with this new pension? It manages to infer that the old system wasn't good enough and in fact may have been unfair at the same time as telling everyone who is currently a pensioner and those who will become pensioners before 2017 that they will be blessed with the unfair system for the rest of their lives. I too paid 44 years contributions to my paltry £107 a week pension. I don't expect fairness from HMGov, I expect to continue to be screwed whilst they take care of them.
14/01/2013 18:32
never before in the history of this nation have so many been conned by so few.No wonder no jobs for the young.put the age up to 80,then govt will save more than the national debt the robbers.Gt Grandad ,Grandad,Dad,my sister plus a few aunts and uncles paid in for more than 25yrs or 30.never saw even 65 any of them .If you live long enough however for how many yrs,5 ,10 if you are very lucky.Thousands die each day that passes,still HM govt rubbing hands with glee,now got cash for bonuses for big bosses ,bankers ,pals etc.
i hate this damn goverment everything they do is unfair down to the child allowances. we are pensioners . and the losers . they have to be voted out soon as pos.another friend has lost their job today, putting major presure on him and his family. rotten to the core this lot are !!!!!
14/01/2013 17:23
And by 2017 just what will £144.00 buy you??
14/01/2013 18:34
14/01/2013 18:41
Having brought up a family of three skimp and scraped to save to get a decent private pension + my state pension of course, I now find that with the two pensions combined I have to pay almost all my state pension back to the government in tax. Yes you might say that i`m very fortunate to have such a good private pension, this is not a company pension and I had to work exceptionally hard to 
achieve this end. The government want to encourage people to save for their old age so that they can steal part of their pension. On my next time around they can kiss my ****, I won`t be saving for old age.
14/01/2013 18:03
as soneone who worked most of my life and paid serps ot enhans my pension where is my increase 
14/01/2013 18:18
everybody is a loser only govt a winner
14/01/2013 18:14
msn, why are you messing about with both the site and trending situations? one can only assume you are in the pocket of Cameron & his clowns. Why? because anything said against this Government you remove. Time I think to go to another site who are impartial. It is becoming very obvious that Cameron has you in his pocket as well as Brooks etc., Would love one of your editors to come out into the open and contradict me.
14/01/2013 18:25
What will £144 a week buy in 2017???? with inflation it will be worth less than the present £107, let mp"s try liveing on it, Its a con trick, work longer pay more for less, come on this aint right, do the maths camaron, youre kidding no one.
14/01/2013 18:52
Im due to retire in october 2016 .Just 2 months before this new rate starts.I suppose that I will be getting just the £107.45.Will Istill be able to get Pension Credit if I nead it then? .This new rate was to do away with this.Big worry.
14/01/2013 19:59
Here we go again!!  You work hard all your adult life.  45+ years paying taxes and national insurance contributions.  Never claimed a penny in benefits etc and what thanks do we get from this miserable bunch of w--k--s!  "Hey, let's shaft the pensioners - AGAIN!!"  Never mind we will just have to go on supporting all the immigrants and work shy who have contributed the square root of bugger all to the economy.  Cheers!! I You most definitely will not be getting my vote at the next election, nor, I suspect from many other pensioners. 
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