One flat-rate benefit paid out to all UK long-term residents over the age of 65 could work as a simple and sustainable solution to the current problems with the state pension system, says the Pensions Policy Institute.
The benefit, which the PPI calls the Citizen's Pension, would effectively remove the means-testing trap and reduce complexity - two major problems currently facing state pensions.
The Citizen's Pension would be based on residency instead of work history, with eligibility set by how long an individual had been resident in the UK, NOT how long they had worked, the PPI says.
The proposal finds support in the example of New Zealand - which has a Citizen Pension system - where just 5% of retirees live in poverty compared with a whopping 20% in the UK.
Alison O'Connell, PPI director, says: "We kept hearing that the complexity of the current system is one of its major faults. In contrast, a Citizen's Pension is simple to understand and makes it clear what can be expected from the state in retirement."
She says the proposed benefit should be introduced at Guarantee Credit level - set to be £105 from April next year. This would not only reduce the risk of people getting too little pension income, she says, but the limit would also make it immediately affordable within the government's pension spending plans.
The amount of benefits would not be generous, but would still "ensure that pensioners are guaranteed a minimum level of income without the need for extensive means-testing," O'Connell says.
Increasing the state pension age to 67 could be one of the ways to pay for the Citizen's Pension, she adds.
Alan Pickering, actuary and government adviser, agrees to a large extent with the PPI's views. He says the UK basic state pension must be significantly strengthened in coming years if the pension industry is to see an end to the current pension crisis.
He says: "In the UK the State system is a major problem not because of its generosity but because of its parsimony. Because the State pension has never provided a pension which parliament has regarded as adequate, private sector arrangements assume the role of privatised welfare and are therefore susceptible to unhelpful political micro-management."
"In order that the private sector can work efficiently, the UK basic State pension needs to be increased dramatically over time," he adds.
Alongside this, he suggests the retirement age should be increased to 68 to support the rise in benefits.IFAonline
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Reporting to Steve Hill
Appointed on 19 September