The UK state pension system is by far the most complex in the world and building an accurate idea of what you might get from the state is nigh on impossible. Currently the amount of state pension money paid out to pensioners can differ by more than £200 a week - that's a difference of £10,000 a year. This is because the level of basic and additional state pension payouts can vary so much.
The latest DWP administrative data shows state pension income varies from around £7 a week to £230 a week. Around 130,000 people get £7 or less a week and the same number of people get £230 or more a week. Pensions expert Dr Ros Altmann points out that it is men who get the most and women who get the least. Official figures show that around 28 per cent of men (only 9 per cent of women) will have state pension entitlements above £180 a week.
However, sensible words from Pensions Minister Steve Webb accompany the DWP figures: "The range of state pension payouts at the moment is simply staggering," he says. "The current system is so complex and would baffle even Einstein. Worse, if people have no idea what they will get, they can't make sure they have enough savings for their retirement."
From 1 October millions of people will be automatically enrolled into a workplace pension via the National Employment Savings Trust (Nest). Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "If the government fails to publish its plans for the state pension by then this long-awaited reform could be thwarted by negative publicity, because under the current system lower-income workers could end up simply replacing means-tested state benefits with the savings they make."
If these DWP figures prove to be a prelude to the publication of the White Paper, then Mr McPhail says we can expect skirmishes on the way to a flat-rate state pension as middle and high earners stand to lose out.
The additional state pension built into the current system can be a very large amount, especially for anyone who has been in the state pension system for many years and paid into Serps (the state earnings-related pension scheme) when it was originally introduced, since it was unusually generous at first. The DWP estimates that a higher earner (earning around £41,000 per year) could be receiving an additional state pension worth an extra £162 a week, on top of the basic state pension of £107.45.
While losing this additional income will hurt, the benefit is that a flat-rate state pension will allow investors to plan better. Plus, if the government guarantees a basic level of income for all, then it will find it harder to justify the moral argument that imposes draconian rules on how you draw income from private pensions. Could this pave the way to flexible drawdown for all? Let's hope so.
