Last autumn, a variety of press reports began to appear suggesting the Government was about to introduce a flat-rate state pension of £140 a week. After nearly six months of such rumours, the Department for Work and Pensions (DWP) published a consultation paper in early April. It was not quite what had been expected, but then the problems the paper addresses are extremely complex. 

The current state pension regime consists of a basic state pension, a state second pension (S2P), a variety of S2P predecessors and two different types of pension credit. This amalgam has been widely criticised as overly complicated, particularly in its interaction with private pension provision. The situation is likely to get worse from October 2012, with the arrival of quasi-compulsory private pension provision in the form of the new National Employment Savings Trust (NEST) and auto-enrolment into employer pension arrangements.

The DWP puts forward two options in its paper, both of which aim to produce a pension above the level of the pension credit standard minimum guarantee (which is £137.35 a week for a single person in 2011/12):

Option 1 This would see S2P become a flat-rate pension in 2020, a stage it is not currently scheduled to reach until the mid-2030s. Ultimately, someone with a 30-year national insurance contributions (NICs) record would look forward to £145 a week (in current terms) from state pension age, provided by two flat-rate state pensions; the basic state pension and S2P. A longer contribution record would only increase the S2P element. Contracting out of S2P would remain an option for defined benefit occupational pension schemes (it is disappearing for defined contribution arrangements from 2012/13).

Option 2 The paper describes this as ‘a more radical approach’, but in reality it looks more like the new state pension regime described in the earlier leaks. S2P would be scrapped and there would be one single state pension, calculated on an individual basis, with no special rules for marriage, divorce or bereavement. This option would include the self-employed, who currently accrue only basic state pension. A 30-year NICs record would produce around £140 a week of pension, but any longer contribution record would not yield a greater pension. There would be no benefit for anyone with a NICs record of less than seven years. All contracting out would end, and the savings element of pension credit would disappear for new pensioners.

The second option is probably the DWP’s preferred route: some experts have seen the first option as little more than a ‘straw man’ to help the case for option two. However, creating an affordable single pension regime raises difficult transitional issues in dealing with existing second tier state pension entitlements and contracted out benefits. The state cannot afford to pay £140 plus all existing S2P and contracted out benefits. In both instances, the paper points to some form of offset, so that, for example, the £140 a week could be a combination of state benefit and the contracted-out element of private provision. 

Neither of these proposals will become a reality soon, and indeed may not happen at all. In any event, they are a sobering reminder of the kind of income the consultation paper’s authors were considering as an ‘adequate’ retirement income – could you live on £140 a week? What either proposal should do is establish a base on which to build a private pension, removing the present risk that such provision will simply replace what the state would have paid under pension credit. 

This article is based on our understanding of the Government’s current position, which is subject to change.