Proposals for a new state pension

The Department for Work and Pensions (DWP) has launched a green paper considering options for the reform of the state pension.

The green paper contains details of two main options under consideration.

Option one would involve a gradual move to a flat-rate state pension between 2013 and 2020. It would see the ability to contract out of the State Second Pension (S2P) retained.

This option would result in a total state pension of £145 per week, made up of a £97 basic state pension and £48 S2P.

The second option proposes a more radical reform of the state pension and is our preferred outcome from this consultation process.

Option two would involve introducing a single-tier state pension of £140 a week. It would be payable at a rate of around £155 a week by the time it was introduced.

This option would remove the ability to contract out of S2P and would result in a ‘contracting out offset’, so those who have accumulated contracted out pension benefits in the past would see their state pension income reduced accordingly.

Entitlement to a maximum state pension under either of these options looks set to still require a 30 year National Insurance contribution record.

Whilst either option would simplify the state pension system over time, it is option two that seems best placed to deliver the much needed levels of simplicity and remove most the confusion associated with state pension entitlement and pension credits.

Regardless of which option is chosen, it would only apply to new pensioners, with those already in receipt of a state pension income at the time the new flat-rate state pension is introduced continuing to receive their old pension benefits.

We look forward to seeing the outcome of this consultation paper and some additional detail around how entitlement to the flat-rate state pension will be accumulated and claimed.

Photo credit: Flickr/Waaghals