As LDV readers will no doubt be aware, this year marks the 105th birthday of the 1908 Old-Age Pensions Act. Through this Act, Lloyd George introduced the first state pension to Britain, providing 5 shillings (£0.25) a week for those over 70. Fast forward nearly forty years to another great Liberal, William Beveridge, and the National Insurance Act of 1946 that gave birth to the modern state pension. Beveridge’s original idea was for a single, simple, decent state pension, paid after a lifetime of National Insurance Contributions and not subject to a means-test.
Beveridge’s principles have been subject to a sort of permanent evolution for decades, after successive governments tinkered with the state pension, often with the best of intentions, but always in a way that made things more complicated. Indeed, what we now have is a system so fiendishly difficult that the Pensions Commission declared the UK system as one of the most complex in the world. Only one in four people agreed in a recent survey that they knew enough about pensions to decide with confidence about how to save for retirement. The reasons for this uncertainty are easy to see.
In Britain today we have not one but two state pensions. We have a basic state pension of £107.45 per week that even the Government doesn’t think is enough to live on. Then there is the additional pension (variously known as SERPS or the State Second Pension), a scheme with variable amounts paid out in retirement according to past earnings but with the chance for people to opt out into a company pension scheme. Even these two pensions together are often not enough to live on, so millions of pensioners receive a further means-tested top-up called the pension credit, and even this has different elements (the ‘guarantee credit’ and the ‘savings credit’) each with its own rules, premiums and tapers. It is little wonder that people think they need to be Einstein to know what they will get in retirement. Worse still, the current system actually discourages some people from putting anything aside; the mass reliance on means-tested benefits leaves people unsure whether they will benefit from the savings they make. But it doesn’t have to be like this.
Wouldn’t it be better if people who had contributed through their lives, either through paid work or caring or in some other way, could be guaranteed a pension clear of the basic means-test, a foundation on which they can build? That is what Liberal Democrats have been campaigning for decades to deliver, and today we have published radical plans for today’s workers to retire on a single, simple, decent pension. Back to the Beveridge model, but updated to reflect modern working patterns and modern patterns of life, with a particular focus on treating men and women the same for the first time.
This new ‘Single Tier’ pension is something that has much in common with the long-cherished Liberal and Liberal Democrat goal of a Citizen’s Pension. The basic idea is that someone starting work under the new ‘Single Tier’ pension rules will build up just one state pension. It will be set above the level of the basic means-test (currently £142.70 per week) and the full rate will be payable for 35 years of National Insurance Contributions. As happens now, there will be credits for those who cannot contribute to their pension because of caring responsibilities, and the new rules will particularly benefit many older women whose time at home with children in previous decades has damaged their state pension entitlements. Each individual will qualify for a pension in their own right, with no complex rules about claiming pensions based on someone else’s contributions. Because the new ‘Single Tier’ pension is set above the basic means-test, money you put aside from working to top up your state pension will be far less likely to be clawed back through Gordon Brown’s intricate means-tested benefits system.
If you are already drawing a pension before the start of the single tier state pension, you will continue to get your pension under the current rules. If you start to draw a pension after the single tier is brought in, our starting point is what you have already built up. That means all the pension rights that you have built up will be honoured.
Single Tier isn’t about spending more money on pensions – it is about spending in a clearer, simpler way to better support private saving. That is why the overall cost of the new system will be the same as the system it replaces. The higher flat pension is affordable because people no longer build up very large earnings-related pensions from the Government. So Single Tier will not be a king’s ransom, but it will cover the basics. It will treat men and women equally for the first time and will value unpaid caring work just as much as a high-flying city job. That is why the big winners from Single Tier will be women, carers and some low earners who haven’t previously received much in the way of earnings-related state pension. And for the first time ever, we will be bringing the self-employed fully into the state pension system.
When the Liberal Democrats first entered Government, our priority was to protect today’s pensioners. That is why we introduced the triple lock guarantee to ensure that the value of the state pension will always rise by whatever is higher of inflation, earnings or 2.5%. That meant that last April we were able to deliver the biggest ever cash increase in the state pension of £5.30 a week and this April will pay an above-inflation increase in the pension. Now we are also tackling the needs of future pensioners and delivering a simple, single decent state pension – something Liberal Democrats have argued for over decades. Delivering it would be a truly radical reform, and one that Liberal Democrats could be proud of.