Govt urged to further simplify state pension regime

The government should consider whether further simplification is needed in the state pension system following the major changes made in April 2016, according to LCP partner, Steve Webb.

Whilst Webb acknowledged that the new regime is "far simpler" than the system it replaced for those who started work since April 2016, he argued that there is still “considerable complexity” for those who had years of work prior to this date.

These complexities, which include making protected payments to those who had already built up more than the new flat rate figure by 2016, arise from the need for ‘transitional measures' designed to improve fairness at the time of change.

However, Webb warned these transitional measures, whilst introduced to smooth the new system, could now result in "largely unnecessary complexity in the system for decades to come", with calculations remaining “very hard” for people to understand.

Currently, anyone who worked before 2016/17 has a state pension calculation in two parts, and whilst this structure usually finds that the worker is entitled to the standard flat rate, they use concepts such as ‘contracted out deductions’, SERPS and 'basic state pension', all of which were abolished in the new system.

As such, Webb has argued that it will become increasingly hard to justify working out state pension for those retiring in 2025 or 2030 with reference to the rules of a system that no long exists.

Furthermore, he has called on the government to make sweeping simplifications to ensure that everyone’s state pension will simply be a function of the number of years they have paid into (or been credited into) the system.

Webb stated: “For younger workers, the new state pension system is already much simpler than what went before.

“The amount they get is linked in a simple way to the number of years they pay in, with a maximum flat rate for 35 years of contributions.

“But for millions of workers who were already in work when the system changed in 2016, the calculation remains complex and opaque.

“Whilst some initial complexity was necessary on a transitional basis to avoid unfairness, retaining this complexity for decades to come will be increasingly hard to justify.

“The Department for Work and Pensions should consider whether the time has come for an even simpler state pension system."

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