Britain takes aim at soaring state pension bill

Mon Jan 14, 2013 9:46pm GMT

* Government proposes single flat-rate state pension

* Payment would be higher than current basic rate

* Britons to work extra five years to qualify

By Tim Castle

LONDON, Jan 14 (Reuters) - Britons will have to work longer to earn a full state pension but will benefit from a higher flat rate when they retire, the government said on Monday as it sought to put a lid on the soaring cost of its universal basic pension provision.

The government will also formally consider at regular intervals whether to raise its state pension age to allow for rising life expectancy.

The measures, outlined to parliament, aim to curb expenditure on basic state pensions, which the government says it set to hit 8.5 percent of economic output by 2060, from 6.9 percent now.

The Conservative-led coalition said a simplified pension scheme, with a flat-rate payment, would provide workers with a firm foundation for retirement and encourage greater private saving for old age.

But Britain's largest pensioners' group said the changes were a "con trick" and would do nothing to help existing retirees.

The coalition has already brought forward increases in the state pension age as health and longevity improve. The threshold will go from 65 to 66 by 2020, and to 67 by 2028.

Under the proposals, a review into further possible rises in the state pension age would be held every five years, with the next earmarked for 2017, after a general election due in 2015.

The government would consolidate a series of different state pension entitlements into a single flat rate worth 144 pounds ($230) a week.

The basic rate is currently set at 107 pounds a week but can be boosted by a complex system of allowances depending on a pensioner's circumstances.

Ministers plan to abolish additional state pension contributions, which can produce retirement payments of up to 200 pounds a week, to help pay for the reforms.

"Our simple, single-tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save," said Pensions Minister Steve Webb.

WORKING LONGER

The switch to a flat rate from 2017 would be financed by removing the ability of workers to save for a higher state pension.

In addition, Britons would have to work 35 years to qualify for the new full pension, compared to 30 years now.

The move to a single-tier pension would restrict the projected cost of state pensions to 8.1 percent of economic output by 2060, the government said.

It said the new scheme would benefit women who took time out from work for childcare, the self-employed and low-paid workers, who all would otherwise have expected a lower basic state pension.

However, around 7 million workers, many in the state teaching and health sectors, who have opted out of a higher state pension in return for lower tax contributions will now face a 1.4 percentage point rise in payroll taxes.

The government said many of these workers would not lose out as they would be compensated by the higher level of the basic pension, expected to be worth 160 pounds a week by the time the new system begins in 2017.

But the opposition Labour party seized on the effective tax hike and said the government had been "caught trying to sneak out another raid on the paychecks of hard-working families already feeling the pinch".

The National Pensioners' Convention (NPC) said the proposals would do nothing to help existing pensioners and would hit those yet to retire.

"They are being asked to pay an extra five years' worth of National Insurance contributions, work longer before they can retire and end up with less than they can get today," said NPC general secretary Dot Gibson.

The Institute for Fiscal Studies, an independent think tank, said the proposals would lead to a cut in state pension entitlement for most Britons in the long term, but added that this could encourage greater private saving for retirement.

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