The government looks set to implement a radical shake-up of the state pension system, with the abolition of means testing and the introduction of a universal state pension of £140 a week. Martin Bamford, managing director of Informed Choice, takes a closer look.
These changes, set to be announced in a green paper later this year, would combine all current elements of the state pension.
This would include the basic state pension and the state second pension.
Those reaching their state pension age would instead receive a single payment above the level of the current pension credit.
Whilst at first glance this might appear to be a more expensive solution to dealing with the growing expense of the state pension, it is believed that the government could save £6bn a year by cutting the bureaucracy around means-testing.
The current means-tested system is fundamentally flawed because it can see those with moderate levels of private pension provision losing state benefits.
This makes the delivery of retirement planning advice to those with lower earnings particularly challenging as recommended pension contributions can effectively be wasted money.
Removing means-testing for the state pension should result in a system where saving for retirement pays.
This would bring the system into line with government aims for the overall benefits system, where they want working to be more beneficial than living on benefits.
One of the issues that will need to be addressed with this change is that of contracting-out of the state second pension (S2P).
Whilst contracting-out is set to be abolished for money purchase pensions from 2012 anyway, those who have not historically contracted-out could see their eventual state pension benefits cut under this new arrangement.
As there has been with most moves made recently by government, there will be questions about ‘fairness' if the result is that those who contracted-out get to keep these benefits and those who remained contracted-in see their accumulated state second pension above the new universal state pension level lost.
We are not suggesting that those who decided to contract-out should be penalised for having done so, but those who remained contracted-in should see their state pension value reflect this decision.
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