Pension Reforms – Proposals for the simplified fixed state pension

The government yesterday unveiled its plans to radically overhaul the state pension, which have been welcomed by some and criticised by others. On the one hand, the proposed system would be a welcome simplification relative to the current complex miscellany of rules, and would give individuals much greater clarity over what state pension income they could expect in retirement. Anyone with 35 years of qualifying activities would receive a fixed pension of £144 a week. Employment, seeking work, looking after young children and caring for sick or disabled adults would all count as equally creditable activities.

On the other hand, there will be many people who will get a lower state pension income as a result of these changes, so we should be careful not to overstate the benefits.

The one group of significant winners from yesterday’s proposals is those who have long periods in self-employment. Those who spend their whole working lives in self-employment could earn up to £144 a week of state pension, compared with only just over £107 under the current system. However, extending pension entitlement in this way would weaken the case for the self-employed paying lower national insurance contributions than employees; therefore, the government may decide to offset this benefit by demanding higher NI payments from them.

Anyone reaching state pension age before 2017 will be entirely unaffected by the proposed changes. Among those reaching state pension age shortly after 2017, there will be some winners, in addition to the self-employed. In particular, those who have 30 years of contributions to the basic state pension, but who are entitled to a total state pension (including the state second pension) of less than £144 per week could see their final pension income increased. This group will include some low earners and people who took time out of the labour market to care for young children or disabled adults prior to 2002. But this group will also include those who contracted out of the second tier state pension – that is, they chose to give up their rights to the state second pension in return for lower national insurance contributions (or a refund of NI contributions). This latter group will, on average, consist of higher earners.

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