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State pension overhaul - a good time to reflect?

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Thursday January 17, 2013 at 9:00am
It’s certainly been a busy news week for pensions, with proposed changes that are likely to see some winners and losers. If you haven’t already got a handle on how you’re going to provide for your old age - and even if you think you have – recent news about pensions means it is well worth your having a review with your independent financial advisor in the near future to check everything is on track.

One bit of news last week provided a sigh of relief. Thankfully after a three-month consultation by ONS, the current RPI will now continue to be used for the uprating of private sector pensions and index-linked bonds. Any decision to alter the current RPI index, so that it rose more slowly, would have reduced the future pension increases of millions of private sector pensioners.

But the big announcement this week came from Government as it outlined proposals for a major overhaul of the state pension.

If implemented, the changes will affect new pensioners from 2017 who would receive a flat rate single state pension, equivalent to around £144 a week in today's money, based on 35 years of National Insurance (NI) contributions. This would replace the existing multi-tiered system of a lower basic rate that can be supplemented for some by means tested benefits.

The potential losers in this new system could be those who are paying lower NI contributions, either because they have a private sector final salary scheme or a public sector pension that ‘contracted out’ of the state second pension. It’s speculated that those in these schemes will be required to pay more NI to help fund the changes.

Certainly at face value, the Government proposed changes do seem to have more winners than losers. In particular, women who have taken time out of work to look after children, low earners and the self-employed would all be likely to benefit from the new proposals. Under NI existing rules they can find it very difficult to earn a full state pension.

A single tier system will at least make it easier for people to know what they will get from the State and that in turn helps plan any additional personal pension provision. Overall, many of us who would have failed a means test in the current system could now be looking at a higher state pension – but of course there are very few who would choose to retire and rely on the state pension alone - even at the proposed rate of £155 per week.

The best way to secure a comfortable retirement is to plan for it and make your own arrangements to save in a personal pension, taking advantage of the tax breaks along the way.

Andy Parker
Chartered Accountant, Birmingham

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