New flat-rate pension will have mixed effect on women
The UK Government has announced that a new, simpler, flat-rate pension will be introduced from April 2017. Women are being held up as one of the main beneficiaries by the government but it is far from clear whether this is actually the case.
Currently, the basic state pension in £107.45 per week but this can be topped up to £142.70 with means-tested pension credit and state second pension (which is based on national insurance contributions). The new changes will see people have to work for 35 years (five years longer than at present) to get the equivalent of £144.
Figures suggest that at least half of all people reaching state pension age before 2050 are likely to be better off, the majority of these people by at least £2 per week. However, by 2060, more than half of those reaching state pension age would be worse off than in the current system. The government's plans would add £9 a week for 750,000 women, with increases expected to be introduced from 2017.
The changes mean that people will have to work for longer to qualify for a full state pension in that they will have to build up 35 years’ national insurance contributions rather than the current 30 years’ contributions. Currently, people begin to build up their contributions after working for one year. Under the new plans, this will increase to 10 years. Those who have less than 10 years’ contributions will not be entitled to a state pension. The pension credit system will continue but only to provide those ineligible for the new pension with a safety net. The second state pension will be abolished although contributions already made will be honoured.
Currently, women who take time off to look after children often do not build up enough national insurance contributions to qualify for a state pension. Under the new system, anyone who works, has been claiming benefits for being unemployed, has been looking after children aged 12 or under, or caring for sick or disabled adults for 35 years will receive a fixed pension of £144 a week when they reach state pension age.
The Institute for Fiscal Studies (IFS) has published an assessment of the plans which concludes that ‘the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups (most notably the self-employed)’. The IFS highlights that many more people would be worse off because ministers plan to cut the amount individuals can accrue every year which means that in the long run, the reform will not increase pension accrual for part-time workers, the majority of whom are women, and women who take time out to care for children.
The government’s plans have also been criticised because women born between April 6 1952 and July 6 1953 will stay on £107 per week while men of the same age will get the higher payment of £144. This will affect 39,000 women in Scotland, and 430,000 women across the UK. These women have already lost out in the equalisation of the pension age changes.
There will also be changes to the six million workers who are in final salary pension schemes, five of whom work in the public sector. Two-thirds of public sector workers are women. The abolition of the separate state second pension, and its incorporation into the new flat-rate pension, will end the system of "contracting out", whereby members pay reduced national insurance contributions but pay no state second pension. From 2017, workers in those schemes will have to pay more national insurance, amounting to a further 1.4% of the relevant earnings on which national insurance is levied. To reflect their lower previous NI contributions, they will only be eligible to receive a reduced version of the single-tier pension when they eventually retire.