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New state pension system improves pensioners’ ‘safety net’

The government’s new flat-rate State Pension of £144-a-week would be equivalent to a private pension pot of up to £130,000 at retirement for a single life annuity without a guarantee, analysis from Prudential shows.

Detailed plans for the overhaul of the state pension system have been outlined in a white paper, published yesterday (14 January) with the new payment equivalent to an income of £7,488-a-year in today’s money, expected to take effect from April 2017.

Prudential’s analysis shows a 65-year old today would need £130,000 to generate the same £144 per week assuming they secured the highest possible single life annuity without a guarantee.

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The £144-a-week, which will replace all existing payments, will increase in line with inflation between now and April 2017, but will only be available to new pensioners, with existing pensioners and those who qualify before then continuing to be paid under the existing system.

Existing pensioners will still need to rely on the £107.45-a-week state pension which can be topped up to £142.70 a week with pension credit and the state second pension.

Vince Smith-Hughes, retirement income expert at Prudential, said the new system improves the “safety net” for pensioners but warned that it should only ever be regarded as part of an overall retirement plan.

He said: “Maintaining your standard of living in retirement means saving as much as possible as early as possible and joining a company pension scheme where feasible.”

Richard Parkin, head of defined contribution and workplace savings proposition at Fidelity Worldwide Investment, said that not only will the pension reform restore simplicity in the means-tested state pension system but it will also provide pension savers with the clarity they need to make informed decisions about their retirement.

He said: “Whilst the universal state pension will make planning for the future a lot easier, it is important to note that it will mean a lower state pension for many Britons in the long run.

“It is therefore crucial that people sit down and work out how much they need on top of the flat rate state pension to achieve a comfortable retirement.”

Jamie Fiveash, director of customer solutions at provider B&CE, added that the announcement is a “huge step forward”.

He said: “The new flat-rate state pension will mean it genuinely pays to save, and that for every pound consumers put aside they will see the benefit when it comes to retirement. Clarity of message and process is absolutely crucial when it comes to pensions.

“With millions of employees being automatically enrolled into workplace pension schemes over the next few years , the current means testing system would have presented us in the future with the very real prospect of ‘mis-selling’ claims. Today’s announcement redresses that issue and will enable providers to give a clear message that it pays to save regardless of the amount.”