The coalition government has announced two forthcoming reforms to the UK pensions system.
Flat-rate state pension
The first change is the abolition of means testing and pension credits in favour of a flat-rate state pension. Iain Duncan Smith, the Work and Pensions Secretary, said the change is being considered because the current system is so complex that most people have no idea what it means, or what the implications will be once they reach retirement age.
Mr. Duncan Smith also said that means testing belittled people, dissuading them both from making a claim and indeed from saving up in the first place. He explained: “Too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means testing.
“When they reach pension age they discover that while they have foregone spending opportunities and made plans to be self-sufficient, others, who haven’t saved a penny, are able to get exactly the same income as them by claiming pension credit. We have to change this.”
Under the current system those who qualify for the state pension (i.e. by having made sufficient National Insurance Contributions for at least 30 years), get a full state pension of £97.65 and then receive a means-tested additional sum to bring their total pension up to £132.60. The new system proposes to give a flat-rate state pension to all who qualify. Mr Duncan-Smith has yet to specify an amount, but reports suggest it’s likely to be around £140 per week in today’s money.
This proposed change to the UK pensions system is part of Mr. Duncan-Smith’s attempts to seek a debate on pension reform as a whole: he has said he wants “a state pensions system fit for a 21st century welfare system, which is easy to understand and rewards those who do the right thing and save”.
Annual allowance charges
The second change, which relates to the private pensions system, concerns a new ruling about annual allowance charges. From 6th April 2011, individuals who incur annual allowance charges of more than £2,000 will be able to use their pension benefits to make the required payments.
In cases where an individual exceeds the £50,000 allowance, pension providers will be required to allow their customers to use the facility to pay the relevant charges.
This reform follows the Treasury’s announcement in October 2010 that the annual allowance limit for pension savings is to be reduced from £255,000 to £50,000 from 6th April 2011. The lifetime allowance will also be cut from £1.8m to £1.5m from 6th April 2012.
Mark Hoban, the Treasury Financial Secretary, said the reforms would benefit UK businesses by motivating their employees to save: “The Government believes that our system is fair, will preserve incentives to save and … will help UK businesses to attract and retain talent.”
The Treasury estimates that £4bn a year will be saved by the changes to the annual allowance and lifetime allowance rules.