Pension experts suggest the Government is likely to introduce measures to ensure individuals who contracted out are not overly rewarded through its proposed simplification of the state pension.

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The Department for Work and Pensions this week confirmed proposals to introduce a flat-rate state pension expected to be £140 a week for new retirees under simplification plans which would see the removal of the state second pension and the ending of meanstested pension payments.

However, it remains unclear how officials will treat people who have contracted out of S2P or Serps and may have built up large pots.

Hargreaves Lansdown head of pensions research Tom McPhail says “a fairly simple” mechanism could be introduced to reduce the universal state pension depending on the number of years the individual contracted out.

He says: “It is entirely possible that the DWP could insert some kind of fairly simple reckoning mechanism, whereby the universal basic state pension will be £7,280 a year but for every year you were contracted out the Government will reduce it by £x.

“So if you were contracted out for 20 years, you might only get £6,000 a year, for example. They may yet bring people’s contracted-out history back into the reckoning.”

Scottish Widows head of pensions market development Ian Naismith says solving the contracted-out issue would be “the single most difficult thing” in reforming state pension provision. He adds: “For people who are contracted out, the simplest thing would be to take out the equivalent amount they would have lost if they were contracted in. Whether they will do that, I do not know.”

Experts believe measures could be introduced to boost payouts to individuals who would have been in line for state benefits much higher than £140 a week due to a combination of S2P or Serps and the basic state pension. Standard Life head of pension policy John Lawson says: “The universal pension will not replace S2P or Serps overnight. I think people will get a credit for the Serps or S2P they have accrued.”

Government plans to reform the basic state pension could result in a two-year contracting-out “bonanza”, according to Hargreaves Lansdown.

The proposals, to be put forward in a green paper later this year, would combine all current elements of the state pension into a single universal payment of £140 a week. This could involve the abolition of the state second pension by the end of this Parliament.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Depending on the terms of the review, this news could mean a last bonanza for contracting out into a money purchase pension. For the next two years investors can still receive rebates into their Sipps or personal pensions.

“If they are ultimately going to receive a universal state pension benefit then these rebates could be ‘free’ money.”

Final salary scheme members could see National Insurance payments rise by 1.6 per cent as a result of the reforms, McPhail adds. Public sector workers, who are already facing a 3 per cent increase in contributions following Lord John Hutton’s independent report, will be particularly affected.

The Government is to create a universal state pension of £140 a week, eliminating the current means-tested system.

The plans, set to be announced in a green paper later this year, look set to combine all current elements of the state pension, including the basic state pension and the state second pension, into one payment above the current level of pension credit. The move would address the wide-spread concerns raised that Nest would be undermined by means-testing.

Currently, a single person can receive £97.65 a week and a couple £156.15, with extra means-tested payments to the poorest pensioners leading to single person payouts of up to £132.50. Under the new regime a single person could receive £7,280 a year and a couple £14,560.

The Government believes it can save £6bn by cutting the bureaucracy around means-testing, according to reports.

Pensions minister Steve Webb has long campaigned for a citizens’ pension.

A Department for Work and Pensions spokeswoman says: “We will be bringing forward proposals for reform in a green paper later this year. Our aim will be a simple, decent state pension for future pensioners, which is easy to understand, efficient to deliver and affordable.”

The Saga Group director general Ros Altmann says; “After years of watching our pension system falling apart, it seems that the Coalition Government’s new Pensions Minister, Steve Webb, may finally be getting to grips with the inadequacies of the UK state pension.”

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Source: MoneyMarketing.co.uk

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