Is a flat £140 weekly state pension viable?

How viable is the Government's plan for a flat £140 weekly pension? And might you benefit or lose out from such a scheme?.

The Government has said it'd like to introduce a flat £140 per week state pension by 2015. This means doing away with additional state pension entitlement, i.e. the state second pension (S2P), and the current pension tax credit system that guarantees a minimum weekly income of £132.60 for those with low incomes. It also seems qualification could be based on residence rather than National Insurance (NI) contribution history (in which case immigration controls would need to be tightened to reduce drain on the system).

On the one hand a simple system is good and costs less to administer, the current SERPS/S2P and tax credits regime is ridiculously complex. And those on lower incomes should get a higher pension. But a flat state pension could cause a lot of confusion and potential inequity. And effectively represents yet another tax rise for higher earners.

Will it apply to everyone, or only those retiring from 2015?

Unknown at present. I guess it depends on whether the net cost to the Government ends up being positive or negative. However, if it doesn't also apply to those who've retired before 2015 then it'll create an inequitable two tier system.

What happens if your additional pension entitlement is higher than £140 per week?

Again unknown. Reports suggest the Government would look to preserve benefits for those with SERPS/S2P entitlement that pushes their state pension above £140 per week. However, given proposals for the flat pension have yet to be published I think it's fair to say this is all hot air, so we'll just have to wait for more solid proposals further down the line.

What if you've contracted-out of SERPS/S2P?

You guessed it, unknown. It seems logical that the £140 pension would be reduced based on how long you've contracted out, else those who've contracted-out could profit versus those who haven't (and conventional wisdom in recent years has been not to contract out). But if plans for a flat state pension turn out to be serious then you might profit from contracting-out until 2015, depending on how the pension is eventually implemented.

What if you've purchased extra years of NI contributions?

Unless the flat pension plans build in provision for this then your extra contributions might turn out to be a waste of money. But again, we'll have to wait and see...

How can the Government afford to pay a higher state pension?

It can't unless it reduces the overall cost going forwards. We're living longer on average and our ageing population means there'll be fewer people working to fund those in retirement over the next 30-40 years, which will seriously stretch the state pension system. The retirement age is rising to combat this, but it probably won't be enough alone. So the Government must be pretty confident that a £140 flat weekly pension will cost less overall than the existing system over time - else taxes and the retirement age will have to continue rising to fund it.

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