Coalition pension plans to raise taxes for millions

The coalition is due to release new proposals on Monday that will recommend a new higher flat-rate pension plan.

The plan will be funded by increasing the retirement age and hit higher earners who have private pension plans.

The flat-rate is set to increase to £142 – up by around £35 – increasing National Insurance (NI) while giving more generous pension payments.

The plan is designed to appeal to low- and mid-level earners, along with women and the self-employed. Tom McPhail, pension expert at financial services company Hargreaves Lansdown, said that the new system will benefit workers even while they are paying higher NI.

He said: “We will ultimately move to a much simpler system – it’ll be a more even system, fairer, everybody will get more closely aligned benefits, so the long term outcome will be much better for everybody.”

Last summer, the coalition delayed the white paper proposal that set out a flat-rate pension amid political tensions as millions saw their pension funds fall.

Summer’s delayed proposal hit those that opted out of the State Second Pension (S2P) and opted into a salary scheme the hardest. Their salary scheme contracted them out of S2P and lowered their NI payments.

Those 6 million higher earners who opted out of S2P and into more generous salary schemes – mostly public sector workers – will now pay the pension flat-rate of 1.4%.

The new proposal will scrap S2P altogether, giving those who have already paid sums through their retirement to make up the loss, confirmed the Department for Work and Pensions.

The proposal hits the highest earners hardest, according to Hargreaves Lansdown, with those earning £40,000 paying an extra £481 while those who earn around the average salary of £25,000 paying an extra £270.

The white paper will also set out a deconstruction of tax breaks for employers who, in total, will see their taxes increase by 3.4%. Experts have warned that this hike could see the end of 6,300 salary schemes.

The government hopes that the system will save billions and cut the overwhelming state debt level in the long term.

Patrick Corby