About half of the UK population is not putting funds into a pension pot. Therefore, the state pension matters. And with an aging population, the question of affordability has been high on the agenda for successive governments. But the question has remained what to do about the pension ‘time bomb’. This week sees the Government’s White Paper launch on proposals for a ‘flat-rate’ pension.

Currently more than 11 million people claim a state pension and some receive a pension credit to top up their pension. It’s argued that the current system is complicated and that the new system will be simpler and fairer. It’s believed women and the self-employed are two groups likely to benefit from the changes. The new system will come into force for new pensioners from April 2017.

The Pensions Minister said this week having a simpler scheme would make it easier for people to understand how much they needed to save to get a comfortable retirement regardless of whether they were saving with a private or workplace pension.  Currently there is a basic pension and a second state pension, so entitlement for many is not clear-cut.

Who Qualifies

Under the new rules people with fewer than 7 or possibly 10 years of National Insurance Contributions will get no state pension at all.  However the self-employed, who normally get a lower level of state pension will gain. As will women who have taken time off work to bring up a family.

Those that qualify for the new £144 pension include anyone who works, is registered unemployed, has been looking after children aged 12 or under, or caring for sick or disabled adults for 35 years. But entitlement will be lower if an individual has less ‘qualifying’ years.

The new arrangements see the end of ‘contracting out’ and anyone in a Final Salary Scheme will find themselves paying higher levels of National Insurance.

Impact on Employers

Employers will face higher costs if their pension scheme is opted out of the second state pension. From 2017 these employers will pay higher contributions – about 3.4% of employee earnings.

Pension Pots

Of course at the current time these are just proposals and it all may look quite different by the time the proposals are implemented. However it’s possible to discern the direction the Government is heading.  The main ‘take away’? With pension pots generally shrinking now is a good time to see what impact the proposals may have your pension planning.