Flat-rate pension 'would solve UK crisis'

Mar 11 2004 by Brian Amble Print This Article

Every pensioner in the UK should receive a guaranteed £100 a week 'Citizen's Pension' in place of the current maze of mean-tested benefits, according to a new report.

The Pensions Policy Institute (PPI) claims that the simple flat-rate benefit - payable regardless of how much individuals contributed during their working lives - would provide a swift, simple and sustainable remedy for the deep-seated problems within the UK’s state pension system

A guaranteed minimum income would also give people a much clearer of what to expect when they retire. The current system of a Basic State Pension derived from National Insurance contributions, a State Second pension and the means-tested Pension Credit is overly-complex and confusing, the PPI says.

The state pension model it proposes, based on residency rather than work history, is the same as that used in New Zealand and would remove the ‘means-testing trap’ that discourages people from saving for their retirement.

The system pays a flat-rate to every individual over 65, single or married, who has been resident for more than ten years. It is also index-linked to average earnings, unlike the current UK system that is linked to inflation.

The fact that only around five per cent of New Zealand’s senior citizens live in poverty compared to 20 per cent in the UK is one compelling argument for the adoption of a Citizen’s Pension, the report claims.

Alison O’Connell, Director of the PPI and author of the report, said:

“We kept hearing that the complexity of the current system is one of its major faults. In contrast, a Citizen’s Pension is simple to understand and makes it clear what can be expected from the state in retirement. There are no disincentives to save with a Citizen’s Pension.

“It would reduce the risk of being under-pensioned. This is a real problem for the many people, typically women, who will not follow the work pattern required to get the full state pension under the current system. There are also no take-up issues with a Citizen’s Pension as there are for means-tested benefits.”

Under current rules, a woman with a working life of 44 years will need 39 qualifying years for a full pension and a man with a working life of 49 years will need 44 qualifying years.

Meanwhile a separate report from the Adam Smith Institute suggests raising the retirement age to 68 and increasing the state pension to 40 per cent of average earnings, around double its current rate.

Written by the author of the Treasury’s review of pensions, Alan Pickering, the report argues that such a radical change would increase the cost of pensions by £40 billion, but that £10 billion could be saved for each year the retirement age is raised by.

The current system costs the UK £70 billion a year.

"By 2008, the basic and state second pensions should be amalgamated and the facility to contract out should be terminated. By 2025 the universal state pension should deliver a benefit of around 40% of average earnings. By the same date, the earliest age at which pensions should be drawn is 68,” the report says.

These proposed changes would be combined with incentives for older people to set up their own pension schemes and contribute to them, simpler tax rules and lighter regulation. Employers also need to change their mindsets over older workers, the report adds and help them re-train and continue earning.