The UK appears to be taking steps to ensure adequate retirement security for everyone. This past January, UK’s Minister of State, Department for Work and Pensions, announced that the government will press ahead with its plans to create a single, simplified state pension in replacement of the current multi-tiered, complex pension system. Details of its proposed plans were published in its white papers, which will provide the basis for a Bill to be put before Parliament. The new simple flat-rate would be around £160 a week and it would start in 2017 at the earliest, affecting only new pensioners.
The minister said that the reform will be “fairer” than the current arrangements, helping a lot of women, especially those who were caregivers for a part of their lives, lower paid workers, part-time workers, and the self-employed, all of whom would otherwise not receive a decent state pension. CARP has long advocated for additional provisions for caregivers and single women, stressing the need to include those that are most vulnerable to financial insecurity. CARP hopes to see Canada also move in the same direction as countries such as the UK make these important changes.
UK’s existing system complex earnings-related, creating retirement insecurity
Currently, the UK pension system is very complex and it is difficult to calculate just how much one would get upon retirement. It consists of a two tier system with different rules and arrangements. The first tier is the basic State Pension, which is a flat rate pension determined by the number of years of contribution. If contributions have been made for 30 years, one can currently receive a maximum of £107.45 a week at State Pension age, which is currently 65.[i]
The second tier is the Additional State Pension, which provides an extra amount of money on top of the basic State Pension. It is not a fixed amount but it is determined by the number of years of Nation Insurance contributions and the person’s average life-time salary earning and it is price-indexed after retirement. Additionally, individuals have the flexibility to “contract out” their Additional State Pension to a private pension scheme that is provided by their employers or financial service companies.
In addition to their pension scheme, the UK also has the Pension Credit, which is a tax-free benefit for people who have reached the State Pension age and considered low income. It provides two types of benefits: the guarantee credit and the savings credit. The guarantee credit pays a benefit to ensure that the person’s income is above a certain level, whereas the savings credit provides additional benefits to those who have already made modest contributions.
New pension system will benefit the worst off
The new single tier system that the government has proposed will simplify the rules and get rid of the previous earnings-related pension and the means-tested credit for low income individuals. As a result, the system will include more people who are currently left out or disadvantaged. Rather than struggling to calculate pension benefits, people will know exactly what they will receive upon retirement and this will enable them to better plan and save.
The governments states that not only will it provide certainty to people about what they will get from the state but it will also provide a better platform for people to save for their retirement. This is especially true for women, caregivers, part-time workers, individuals with low income, and the self-employed since these individuals currently have a difficult time earning a full state pension. The UK government predicts that the following key benefits will result from the new single tier system:
- Approximately 750,000 women who reach pension age in the decade after Single Tier is introduced will on average get an extra £9 a week.
- Under the present system, 4.2 million self-employed people are prevented from getting a full state pension. The Single Tier will now properly recognise their NI contributions.
- By the 2040s, over 80 per cent of people reaching State Pension age will receive the full weekly amount of single-tier pension.
Canada needs to follow suit
Although there are many concerns and complaints, especially from those who are currently “contracting out” their second tier pension, the changes appear to be a step in the right direction. It aims to ensure that all will have a fair opportunity to an adequate pension even in the midst of fiscal constraints and long-term sustainability challenges. CARP has long advocated for additional provisions for caregivers and single women. As UK moves forward with their reform, it is hoped that Canada will take notice and also consider taking the necessary action to address the needs of those who are the most vulnerable.
February 8, 2013
[i] According to 2008/2009 numbers