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New flat rate State Pension plans become law

22 May 2014

Government plans to reform the State Pension have now become law, paving the way for the introduction of a single-tier flat rate pension with effect from 2016.

The new single-tier pension will replace the existing two-part system, with the aim of reducing complexities in the system and providing clarity regarding the value of individuals’ income on retirement.

Under the reforms, the Additional State Pension will merge with the basic State Pension. The move will also see the end of derived entitlement to the basic State Pension.

The new flat rate pension will be set above the basic means test, currently 148.35. To qualify for any State Pension, individuals will need ten qualifying years of national insurance contributions (NICs). Once the changes are introduced, those beginning to make NIC payments for the first time will need 35 years of contributions.

Studies suggest that those most likely to benefit from the change are individuals who have spent long periods of time out of work or in low-paid jobs, the long-term self-employed, and those who contracted out of the earnings-related State Second Pension.

Commenting on the news, Minister for Pensions Steve Webb said, ‘The new State Pension will replace the current complex mix of basic and Additional State Pension which successive governments have tinkered with so much over the decades’.

‘It will give people clarity and confidence about what income they will get from the state in their retirement. In addition, the State Pension reforms will benefit those who have historically done poorly under the current two-tier system.’