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People in their fifties are the big winners from the plans announced by the Government to reform the state pension. They will qualify more easily for a full pension and will get bigger increases in them each year. But they will avoid the further rises in the state pension age – eventually to 68 – and cuts in the State Second Pension as well as other subtle means of saving money that were announced in the Government White Paper Security in retirement: towards a new pensions system published at the end of May.

The best date of birth for a woman is probably 6 April 1950. Despite having a month added to her pension age, she will benefit from many changes to the qualifying conditions for state pension which will boost the pension many women get. For men the best date is 6 April 1947. They will benefit from the changed qualifying conditions, will see their state pension rise in line with earnings and they retire before the value of contributions to the state second pension is cut.

The news is worse for younger folk. People now 46 will have to wait until 66 to get their state pension. And pension age will rise again to 67 for people aged 37 and it will be 68 for people now aged 28 or less. In addition they will see the value of the State Second Pension cut – although contributions will probably remain as high.

The big gap in the White Paper is that there is almost nothing for today’s pensioners or those who reach pension age before 6 April 2010. It is widely accepted that older pensioners are poorer than younger ones and that among them women are generally the poorest of all. But the Government has not accepted recommendations to boost the pensions of people over 75. It has also rejected the idea of a Citizen’s Pension – paid to everyone on grounds of citizenship rather than National Insurance contributions – and there is no mention of any one-off increase to the basic pension to recognise that it is now barely a fifth of average earnings and worth no more than 16 hours work on the minimum wage. Although some will eventually benefit from raising the state pension in line with earnings that will not start until 2012 at the earliest (it could be as late as 2015), three million of today’s pensioners will not live to see it. The value of pension credit will rise more slowly than it does now for those who get fairly small top ups to their own income.

Pension Age
Between 2010 and 2020 the state pension age for women will slowly rise from 60 to 65. That change – which was announced more than ten years ago – will affect any woman born on 6 April 1950 or after. Women born on 6 April 1955 or later will get their pension at 65. The Government now proposes to raise the pension age further – eventually to 68. That change will be in three phases and affect everyone who was born on 6 April 1959 or later. Pension age will start rising on 6 April 2024 and someone born on 6 April 1960 will have to wait until they are 66 for their pension. The next rise will affect people born on 6 April 1968 or later and the final rise starts in 2044 and anyone born on 6 April 1978 or later will reach state pension at 68.

The Government says these increases simply reflect changes in life expectancy and men will still have on average around 21 years of life after pension age and women around 24 years.

The savings from raising state pension age – around £30 billion a year from 2050 – will be put towards the cost of two big changes to the state pension. First it will be easier to qualify for a pension which will help hundreds of thousands of women get more money. But that change will only apply to people who reach pension age on 6 April 2010 or later – women born from 6 April 1950 or later (who will actually reach pension age on or after 6 May 2010) and men born from 6 April 1945. Anyone born before those dates will not benefit. Second the pension will once more be linked to average earnings rather than the rise in prices.

Easier to get
Qualifying for a state pension will become easier in two ways. First, the number of years National Insurance contributions needed to get a full pension will be cut. At the moment a woman needs 39 years and a man needs 44 (though that can be reduced by five if he stops work at 60). From 6 April 2010 that period will be slashed to 30 for men and women. That will help many women who did not spend all their lives working and paying full National Insurance contributions. It will also help the generation who went to university in the 1960s and have gaps at the start of their working lives. From April 2010 there will be no minimum number of contributions to get some pension. At the moment if you have fewer than ten years you cannot get any pension at all. In future even one year will give some – very small – state pension entitlement.

The change also means that many people will have paid enough contributions to get a full pension by their late 40s or early 50s. But if they are working they will have to continue paying National Insurance contributions right up to pension age – perhaps for 20 years after they have qualified for a full pension. That will weaken the link between paying contributions and getting a pension.

The change also means there is now great uncertainty about the value of paying extra contributions to fill a gap in your record. Many people who have done so in the past may have wasted their money if they will reach pension age on 6 April 2010 or later as the new system may give them a full pension anyway. It is unlikely they will get any money back. It is probably safest not to pay extra National Insurance contributions until the details of the changes have gone through Parliament sometime next year.

Many people, women particularly, do not spend even thirty years in paid work. But they often spend many years bringing up children or caring for relatives. Another major improvement will give non-working parents full National Insurance credits for each week they get child benefit. At the moment they can get what is called Home Responsibilities Protection for each whole year of child care. That boosts their pension entitlement but not as much as if they had National Insurance contributions. And in future they will get one week’s National Insurance credit for each week of child care. There are improvements too for people who care for a disabled person. At the moment the rules about getting credits or HRP are complex and do not normally apply to anyone who spends fewer than 35 hours a week caring. From 6 April 2010 everyone caring for a disabled person for at least 20 hours per week will get a National Insurance credit for each week.

Any HRP already earned for child care or caring for disabled people will be converted into National Insurance contribution credits for anyone reaching pension age from April 2010.

Currently less than half the women who reach pension age get a full pension. By 2020 these changes will raise that to 90%. They will also help some men.

Earnings link
The second major change to the pension will link it to earnings rather than prices. Earnings rise faster than prices so that will push up the value of the state pension in future, adding another £30 or so in twenty years’ time. If the link had not been ended in 1980, the basic pension would now be £142 a week and all these debates about improving the state pension would be unnecessary. The Government has set a target date to make this change from April 2012 "subject to affordability and the fiscal position" but it warns that it might be delayed to "the end of the next Parliament" which could be as late as 2015. The Government will make an announcement after the next General Election – if Labour wins and if politicians have not embarked on yet another pension review.

A man on state pension who has a wife or partner who is not working and is too young to get a state pension herself, can claim an Adult Dependency Increase (ADI) of £50.50 a week for her. ADIs will be scrapped for new claims from April 2010 and ADIs in payment will be end ten years later. That also means that the extension of ADIs to civil partners and women with male dependants, scheduled to begin in 2010, will not now happen.

The State Second Pension
Long seen as the poor cousin of the basic state pension, Barbara Castle’s SERPS, now called State Second Pension or S2P, can provide someone retiring this year with £146 a week – though most get around a tenth of that. Eventually it will be changed from an earnings-related pension to one that is flat-rate and worth a maximum of £65 a week and it will continue to be raised in line with prices not earnings. Any SERPS or S2P already earned will still be paid. But for every year worked from April 2008 the pension earned will become more and more flat rate and eventually will be worth around £1.40 a week for each full year paying (or being credited) into S2P.

Pension Credit
One of the principles behind the reforms is to reduce the number of pensioners entitled to means-tested top-ups of the state pension. Currently about half of all pensioners could get extra money through pension credit, though as many as 2 million of them do not claim it. Under the present scheme that proportion would have risen to more than 70% by 2050. Raising the state pension in line with earnings and changing S2P will help bring many people above the level to get pension credit. But the Government wants to do more and has decided to change the arithmetic so that the smaller amounts of pension credit given to those with their own incomes on top of the state pension will not rise as rapidly as had been planned. The change will start slowly in April 2008 and accelerate from 2015. The change will mean lower rises in pension credit for more than two million people compared with the present system.

Works pensions
The Government also set out plans to encourage everyone in work to save for a pension on top of what the state provides. At the moment many employers do not offer a pension scheme and even when they do many employees do not join it.

From 2012 both those things will be tackled. First, every employer who does not provide a company pension already will have to do so. Normally that will be through a new national private pension scheme called a ‘personal account’. It will probably be run by the insurance industry on behalf of the government but the exact details have not been worked out. Costs will be kept very low and choices will be limited.

Second, everyone in work aged between 22 and pension age who earns more than around £5000 a year will be automatically enrolled in the company scheme or the personal account when they start their job. They will have the right to opt out of the scheme, but the evidence shows that if joining is automatic far more people are members of the scheme. People over pension age will not be automatically enrolled but will be able to join the scheme up to age 74.

Under the new personal account, 8% of pay between around £5000 and £33,000 would go into the scheme. This would be made up of 3% from the employer, 4% from the employee and 1% from basic rate tax relief. Either party would be free to contribute more – up to certain limits which have not been announced yet. The employer contributions will be phased in from 2012 to 2014 and small employers will get help with the costs in the early years. Self-employed people will also be able to save into the personal account. So will non-employed people up to a limit of £3600 a year.

The Government has decided not to change the current system of tax relief which benefits better paid people. Under this system all contributions to a pension scheme are free of tax. People who pay tax at the basic rate and put £100 into a pension get an extra £28 from the Treasury. But people whose income is enough to pay higher rate tax get much more. For every £100 they put in the Treasury contributes a total of £67. As a result more than half of the £18 billion a year which is spent on personal tax relief on pension contributions goes to the richest 5% of the population – those paying higher rate tax.

The plans set out in the White Paper Security in retirement: towards a new pension system have a long way to go before they are law. First, there is consultation – you can comment on the proposals until 11 September. Second, the Government will then produce a Bill – probably late in 2006 – which Parliament has to pass, probably by the summer of 2007. But before any of the changes come into effect there will be a general election. A new Government may want to make its own plans. You can read the White Paper at www.dwp.gov.uk/pensionsreform or get a free summary by calling 08457 31 32 33.