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£144-a-week state pension from 2017

A folder labelled pensionsThe government has confirmed plans to introduce a more generous flat-rate state pension and abolish means-testing of retired people.

The scheme is expected to begin in 2017, and will pay a weekly £144 in today's money.

The actual sum will adjusted for inflation over the next four years, and annually after that.

End of complexity

The proposals will replace the current complex system, in which those who have reached the state pension age – currently 61 for women and 65 for men – qualify for a basic state pension of up to £107.45.

Currently, individuals may also receive a second state pension, which is based on earnings in work, and means-tested pension credit if they have little extra income.

These three elements will be replaced by a single, easy-to-understand payment.

The new, flat-rate pension will, however, continue to depend on how many years' National Insurance contributions individuals have made.

To qualify for the full amount, a minimum of 35 years will be required, compared with 30 at present.

And anyone who has fewer than 10 qualifying years' National Insurance payments will not be entitled to the new pension.

Winners and losers

But while many people who retire after the start of 2017 are set to benefit from the higher pensions and the end of intrusive means-testing set out in the government White Paper, those who reach pension age before then may feel they have lost out.

Existing pensioners and those who qualify for the state pension before the new system takes effect will still need to rely on the £107.45-a-week state pension, which can be topped up to £142.70 a week with pension credit and the state second pension.

Dot Gibson, general secretary of the National Pensioners Convention, said: "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.

"This will only add insult to injury to millions who have already made a contribution to our society but are still living in poverty."

Welcome from industry

However, other commentators took a more positive view, particularly of the fact that the scrapping of the means-tested pension credit will encourage more workers to save for their retirement.

Joanne Segars, chief executive of the National Association of Pension Funds, said: "Today's announcement for a simpler, more generous state pension is a much-needed shake-up that will ultimately help millions of pensioners and savers.

"For the first time in a generation, people will know that it pays to save, and that whatever they put aside won’t be eroded by means-testing when they retire.

Segars added that the current state pension was "unfair, complicated, and in desperate need of an overhaul".

She said: "Its maze of payments and credits mean that even financial experts are often left wondering what they will get."

£130,000 private pension pot equivalent

The government's new flat-rate state pension of £144-a-week would be equivalent to a private pension pot of up to £130,000 at retirement, according to research by pensions provider Prudential.

Prudential's analysis shows that a 65-year-old today would need a £130,000 fund to generate the same £144 a week, assuming they secured the highest possible single life annuity without a guarantee.
 
An annuity is the investment vehicle that converts your private pension funds into an income that is guaranteed for the rest of your life. Click the link to read a beginner guide to annuities.

Vince Smith-Hughes, retirement income expert at Prudential, said: "The new system improves the safety net for pensioners in the UK but should only ever be regarded as part of an overall retirement plan.

"The real income shock for many will come when the gap between their current earnings and the state pension becomes apparent.

"Maintaining your standard of living in retirement means saving as much as possible as early as possible and joining a company pension scheme where feasible."




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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris



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