ByRos Altmann, Ros Altmann
The Government may at last be getting to grips with proper state pension reform.
For years, ministers have tinkered with our state pension system, constantly adding to its complexity, while failing to address the fundamental problems.
We have just about the lowest - and most complex - state pension in the developed world. Most people have no idea what state pension they will be entitled to.
Anyone retiring at the moment could receive the basic state pension, a state second pension, some state earnings related pensions (SERPS) or a graduated pension, each having their own different qualification criteria and rules. And if all these are not enough to lift them out of poverty, nearly half of pensioners can claim a complex, means-tested pension credit, consisting of a guarantee credit and a savings credit. What a mess.
Such a heavy reliance on pensioner means-testing is a fundamental problem. Means-testing undermines private pension saving, because people can lose some or all their private pension in the means test, so pension saving may have been a waste of money.
Given government plans to establish a new national pension scheme (called NEST), specifically targeted at low-to-moderate earners, and automatically enroll everyone into workplace pensions, it is vital to ensure that pension saving is safe from means-tested penalties.
Politicians have so far ignored this problem, but it is really important to sort this out. And finally, it seems as if ministers are intending to do just that. The government proposes introducing a flat-rate state pension, combining the basic and second state pensions into one minimum payment of £140-a-week (the basic state pension is currently around £100-a-week).
Everyone with a full 30-year National Insurance record would automatically get at least £140-a-week pension. People already entitled to more will still get that higher amount. Many future pensioners will get much more state pension - and without a means-testing penalty to their private savings. The only real problem is that this proposal is only for people reaching pension age in around 2016. Yet, this system is so good, existing pensioners will want it too. The government must consider improving things for current pensioners as well.
But in future, just imagine it: one decent, simple flat-rate state pension that everyone could understand, a stable base on which to build private savings, without fear of mass means-testing.
This is the best pensions news for years.
Ros Altmann is the director general of Saga and a former government pensions adviser