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Pension winners and losers

BRITAIN'S old age pension is currently the most complex in world.

The change to a universal flat payment in 2017 is designed to simplify the two-tier system, which is further complicated by a means-tested top-up that deters people from contributing to pension schemes.

By setting the rate at £144 a week at today's prices, just above the level currently paid to those who also receive pension credit, it will do away with means testing which carries high administrative costs and is inefficient. An estimated 1.6 million people who are entitled to pension credit fail to claim it.

The advantages of simplicity and clarity are immense. But, as with any welfare reform that claims to be cost-neutral, the flat-rate pension must be paid for by creating losers as well as winners. Those who will gain most are women who take time out of work to care for children or other relatives and self-employed people. Those with most to lose are higher-paid employees who contribute to the state second pension. The contributions they have already made will be protected but the scheme will be phased out requiring them to pay higher National Insurance contributions. As this will provide the Treasury with between £6 billion and £9 billion, committing a proportion of this sum for future pension payments would increase credibility in the scheme, which would leave more than half of those reaching state pension age after 2060 worse off according to the Institute for Fiscal Studies.

The changes are mainly driven by increased longevity, which has made the current system based on 30 years of National Insurance contributions unsustainable. The contributions threshold will increase to 35 years and the state pension age, already rising from 60 to 65 for women, will be increased to 66 for all by 2020 and probably to 67 by 2028. That raises the prospect of many people paying National Insurance for 45 years or more but gaining no more in pension than someone who has contributed for 10 years fewer. It also raises the question of penalising manual workers who are unable to continue working into their late 60s. However, in an overdue recognition of this injustice, the Government has asked an independent panel to consider life expectancy as a factor in pension entitlement.

The position of more than 400,000 women now aged 59 and 60 must be reconsidered. They have already lost out in the equalisation of the pension age but will now not be eligible for the new pension while men the same age will qualify. This is a clear injustice which must be rectified.

The Government should also recognise the need to ensure existing pensioners receive the full amount they are entitled to.

Longer life expectancy means we will all have to work longer and save more to finance our retirement. Auto-enrolment requiring every employee to pay into a pension unless they opt out is a step towards a more adequate pension provision for lower-paid workers but it may result in a false sense of security over how comfortable a retirement will result from a 3% contribution. The flat-rate scheme pension has the merit of providing clarity about what people can expect in retirement. A guaranteed minimum income without means-testing will prevent the thrifty being penalised. But the prospect of living on £144 a week or its equivalent must prompt individual pension provision if we are to avoid pensioner poverty.

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