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New flat-rate state pension to be introduced

The Government is outlining a new flat-rate state pension today, to come into force in April 2017, which could mean higher NI contributions for many public sector workers – but also higher pension payments in the future.

The scheme would combine the basic state pension and second state pension and result in a weekly payment of £144, with inflation-linked rises.

The current full state pension is £107.45 a week, which can be topped up with pension credit and the second state pension to £142.70. Existing pensioners and those who qualify before 2017 will continue to receive entitlement through the current system.

The state pension age is rising to 66 by 2020, with plans to increase this to 67 between 2026 and 2028. The weekly allowance is expected to continue rising in line with earnings, prices or 2.5% – whichever is greater.

Anyone who has not paid national insurance for at least ten years will not qualify for the new pension.

The scheme will be particularly beneficial to women, the DWP has stated. The Government estimates that 750,000 women who reach pension age in the decade after the new system is introduced will receive an extra £9 a week. 2.8 million currently receive a state pension of under £80 a week, compared with 474,000 men.

Work and pensions secretary Iain Duncan Smith said: “This reform is good news for women who for too long have been effectively punished by the current system. The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family.”

Paul Johnson, director of the Institute for Fiscal Studies (IFS), told Radio 4’s Today programme that the results of the change are complex, with some people, notably the self-employed being better off, but many workers likely to be worse off over the longer term. He said: “The result for most public sector workers would be…somewhat higher NI contributions, but also rather higher pensions and payments. At the moment, if you are on a public sector occupational scheme, you are effectively giving up your right to the state second pension. Under this new system, you would get the full flat-rate pension, plus you would continue to get your public sector occupational scheme.

“The self-employed will be the one group who are unequivocally better off in the long run, because at the moment they are not earning any state second pension, and in the long run they will get the whole £144 or so.”

Michelle Mitchell, charity director general of Age UK said the proposals could “help transform retirement for future pensioners, bringing clarity and stability to a system which is currently opaque and unfair.

“We would also like to see the same imaginative thinking applied by the Government to the issue of the current unacceptable levels of pensioner poverty to allow that age group the same peace of mind.”

But National Pensioners Convention general secretary Dot Gibson called the plans a “con trick”, adding: “The white paper offers nothing to existing pensioners and leaves many of them to struggle on lower pensions and a complicated means-testing system. The worst affected will be around 5 million older women who don't have a pension anywhere near £144 a week and would clearly benefit if they were included in the new arrangements, but look like they are going to miss out.”

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