Single-tier, flat-rate: a fresh start for the new state pension?

Published by Malcolm McLean on

Although it seems to have been a long time in the making, we now have (as from today 6 April) the new state pension in force and up and running.

The new state pension, or the single-tier pension as it is also known, has already proved to be something of a mixed blessing. Initially trumpeted by ministers as a simpler, easier to understand flat-rate pension it appears in reality to be anything but, given that in the first year of operation there are a multitude of different rates that will be paid out and the rules for the transition as to who gets what and when could hardly be more complex.

Better, but at no extra cost

"In the short term, for many people the pension will unfortunately not be the simple, flat-rate, more generous state pension the politicians had originally inferred it might be."

I have to confess that despite the welter of criticism that is heading their way I have some sympathy with the DWP and the former Pensions Minister, Steve Webb, whose brainchild the new single-tier pension was and who appears to have been given an extremely difficult task to design something which complied with a very clear cost restriction from the Treasury.

According to rumour the DWP was told that, yes, the new-style pension could be conceived and brought in as and when they liked but – and here’s the sting in the tale – it had not to cost any extra money overall when compared with the existing system.

This effectively meant two things. It meant that if some people were to be given a better deal there had to be others who didn’t benefit - either at all or who actually lost out under the new arrangements. Past accrued rights and benefits had to be recognised and taken into account which inevitably also significantly complicated the process of moving from the old to the new.

Winners and losers

The plans that have subsequently emerged appear to meet the Treasury’s requirement but inevitably suffer as a result of it. The policy is essentially redistributive in nature in that the change provides a generally better deal for lower paid workers at the expense of others of today’s younger generation who might have stood to gain more from the existing system. There is also clearly a good deal of resentment from many existing pensioners who believe they are missing out by being excluded.

In the short term, for many people the pension will unfortunately not be the simple, flat-rate, more generous state pension the politicians had originally inferred it might be. The transitional arrangements for moving from the old to the new are complex are not well understood, particularly in relation to the deductions that have to be made from the starting level of pension for past periods of contracting-out of SERPS/S2P.

Malcolm was interviewed about the new state pension on BBC News

A miserly weekly increase

In the longer term though, we ought to have a simpler, more understandable system which, if the pension remains above the pension credit threshold, will be beneficial to the low paid and encourage them to make whatever private saving they can on top of what they might expect to get from the state without the worry of losing other means tested support.

That said, the difference in the first year of operation between the effective minimum income guarantee level of pension credit and the new state pension (assuming it is paid at the full rate of £155.65 per week) is a miserly 5p a week and this will clearly have to be widened if this incentive to save is to be bolstered and maintained.

Capping for medium to high earners

"The difference in the first year of operation between the effective minimum income guarantee level of pension credit and the new state pension at the full rate of £155.65 is a miserly 5p a week."

For other workers on medium to higher earnings levels, it will be important to recognise that for them the new 'capped' state pension may well be less generous than under the present system. The so-called 'triple lock' on the pension is unlikely to continue much beyond the end of the current parliament and for younger people their state pension age is destined to continue to rise and could reach as high as 70 within the next 25 or so years. This reinforces the need for them to make private provision for themselves starting as early as they can so as to ensure they can give up work at an age that suits them and still enjoy financial security throughout the remainder of their lives.

For some, the old scheme still applies

In regard to existing pensioners who have reached their state pension age before the start date on 6 April, the old scheme continues. Whether this is desirable and/or sustainable over the many years before every single one of today’s pensioner population has died off is an open question.

Maintaining two sets of rules running side by side over such a long period of time will not be easy and will undoubtedly lead to problems later on. But the cost of converting all 'old style' pensioners on to the new system may be prohibitive and ministers may have to accept that it will be impracticable to do so for many years yet.

And so as we start to implement yet another radical change in the pension landscape, the future is a bit hazy as to the exact direction of travel and how and where it will all end up. Whether this represents a true new beginning or yet another set of policies destined to be scrapped and revamped in the light of experience (or on a political whim) remains to be seen.

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