State pension faces retirement

By MICHAEL CLARKE
Updated:

 

THE UK's creaking and complicated state pension could be phased out by the end of the decade and replaced with a flat rate 'Citizen’s Pension' of £105 a week.

The National Association of Pension Funds said a study on the scheme - first proposed over two years ago - revealed it was do-able, affordable and achievable within six years.

It said the change would instantly improve the quality of life for 8m pensioners who currently receive less than £105 under the present system.

These would include over 1.5m pensioners currently entitled to Pension Credit who do not receive it, and millions of women pensioners who would satisfy residency criteria for the Citizen's Pension but who are not entitled to a full pension under the present system.

The association's report claims the new pension could be implemented without an increase in public expenditure.

Eligibility would be based on residency rather than on work record and National Insurance contributions, with means-tested pensions scrapped.

NAPF chief executive Christine Farnish said: 'Britain’s state pension is horrendously complicated. Despite the availability of 27 different benefits, the system still fails to deliver a fair deal to millions of pensioners.

'Means testing is expensive to administer and only two thirds of those eligible claim. It also discourages people from saving.'

In the long term, NAPF suggests the Citizen’s Pension could be funded through higher tax or national insurance contributions, an increase in the state pension age or less generous tax relief.

The Government appears to welcome changes to the current pension system.

Work and pensions secretary Alan Johnson said: 'The first question is: Should everyone be entitled to retire on the basic state pension?

'Yes is the answer, irrespective of their contributions. The current system is unfair for women.'

One of the UK’s largest pension providers, Scottish Widow, welcomed the suggestion but warned further consultation is needed.

Head of market development and technical support said: 'This is by no means a straightforward matter, and any proposal raises difficulties.

'In particular, raising the state pension age is not a step to be taken lightly.'

The Pensions Policy Institute echoed Scottish Widow’s view. Director Alison O'Connell said: 'Although the Citizen’s Pension is simple, the transition needs a lot of thought, because of the complexity in the current pension system.'

She added: 'A Citizen’s Pension, while not without some concerns, would be possible and could also have real advantages for state, occupational and personal pensions.'

Shadow work and pensions secretary David Willetts said: 'I share the objective of wanting to reverse the spread of means-testing amongst pensioners. That's the mainstream consensus to which everyone bar Gordon Brown now belongs.

'The Citizen's Pension is one way of achieving this objective but the contributory principle does matter to people. We have to be confident that any reform of state pensions can be financed in a way that does not damage funded pension saving.’

Most watched Money videos