Single-tier state pension is unveiled

Pensions minister Steven Webb has unveiled plans for a single-tier state pension as part of efforts to eradicate complexity.

The Green Paper, A State Pension for the 21st Century, outlines measures to simplify the state pension system for future pensioners by replacing means-tested benefits with a pension worth around £140 a week. The single-tier pension would be set just above means-tested pension credit of £137.35.

The government said that the redesign, still based around a contributory principle, would lift millions out of means testing over time and put an end to inequalities that penalise women, low earners and the self-employed.

Webb said: “The current state pension system is dogged by complexity and confusion, it makes it very difficult to save for retirement and leaves millions of people relying on complicated means-tested support.”

Iain Duncan Smith, secretary of state for work and pensions, added: “We have to send out a clear message across both the welfare and pension system: you will be better off in work than on benefits and you will be better off in retirement if you save.”

The National Association of Pension Funds (NAPF) described the plans as a turning point for the UK’s pension system but sounded a word of caution with regards to the end of contracting out for defined benefit (DB) pension schemes.

Joanne Segars, chief executive of the NAPF, said: “The end of contracting out by defined benefit (DB) pension schemes is an inevitable part of simplification.†

“But the government must make an early promise that it will make it simpler for schemes to contract back in. It must not load extra costs and red tape on these pension schemes, which are under severe pressure.”

Meanwhile, Marc Hommel, pensions partner at PriceWaterhouseCoopers (PWC), said the proposals would help employers comply with auto-enrolment. “The proposals to end means testing also make much more workable the requirements to automatically enrol employees into quality pension arrangements.

“It is encouraging that the government is working to ensure state and workplace pensions are fundamentally connected.”

Martin Palmer, head of corporate pensions Friends Life, said: “With auto-enrolment just around the corner, the timing of today’s announcement is ideal.

“For far too long now, complexity has clouded pension and retirement planning in this country but today’s announcement should go a long way towards removing this. Our research shows a growing trend for savers in the UK to take responsibility for funding their own financial future, and today’s clarification of what individuals might expect from the state come retirement should help them achieve this.”

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