e-mail Paul Lewis on paul@paullewis.co.ukThe Government is proposing the most radical change in the state pension for more than thirty years. But it will be at least five years before it begins and when it does many will be excluded. The Pensions Minister has said the new pension is unlikely to begin before the General Election set for May 2015. So the earliest it could start looks likely to be April 2016. And if the election returns a different government that could delay things further.
Who will get it?
The Government has made it clear that anyone who has reached pension age
before the date when the new pension starts will not be entitled to it. They
will remain under the present system. If it starts on 6 April 2016 that would
exclude any man born before 6 April 1951 and any woman born before 6 April 1953.
People will not be able to defer claiming their pension to a later date to
become entitled to the new pension. It is the date a person reaches pension age
which will determine which system applies to them.
Qualification conditions for the new pension will the same as they are now – 30 years of National Insurance contributions. The qualifying period was reduced from 44 years for men and 39 years for women for people who reached pension age from 6 April 2010. Contributions include those which are credited to people on certain benefits or who care for a child or a disabled adult. People with fewer than 30 contributions will get 1/30th of the full pension for each year. However, those with fewer than seven years of contributions will not get the new state pension at all. Before April 2010 people needed ten years contributions to get any pension. But since April 2010 one year is enough. Raising that to seven will save money.
What about married
women and widows?
At the moment a married woman can claim a state pension
of about 60% of the full rate if she does not have a bigger state pension on her
own National Insurance contributions. Similar rules apply to married men and
civil partners. The new system will have no equivalent. An individual will get
only what they have earned on their own contributions. At the moment men and
women can also inherit state pension from a spouse or civil partner who dies
before them. The Government does not know how – or whether – that will be
possible under the new rules. Either way, this change will also save money.
How much will the
pension be?
The Government has said that the new state pension will be
around £140 and will absorb three things: the basic state pension; the earnings
related pension called SERPS or S2P paid on contributions made from 1978, and
the Graduated Retirement Benefit which is based on contributions paid from 1961
to 1975. The Government guide figure of £140 is in terms of the value of
pensions in 2010/11 so it will be more than that when it is finally paid. The
Government has said that the whole of the new pension will rise by wages or
prices (measured by the Consumer Prices Index) or 2.5% whichever is the highest.
At the moment that rule applies to the basic pension but not to SERPS or
graduated pension which rise just with CPI inflation. Using the Government’s own
predictions of how prices and wages will rise over the next few years, if the
pension begins in April 2016 it could be between £160 and £175 a week.
I expect my pension
to be bigger than £140 under the old rules – will I get less?
About 1.5
million people already get a state pension which is £150 or more. The Government
has said that anyone who reaches pension age after the new system begins and who
would have got a bigger pension under the old rules will keep that bigger
pension. However, as time passes the value of SERPS and state second pension
will diminish and eventually everyone will get more from the new pension than
they would under the present system.
People who are in a salary related pension scheme get a payment with their company pension which replaces any SERPS or State Second Pension they have. That will continue after the change. So someone with a good company pension will find that part of the new pension will be paid as part of their company pension.
What about pension
credit?
At the moment anyone who has an income below £137.35 (single) or
£209.70 (couple) can get their income topped up to that amount through the
Pension Credit guarantee credit. There is also an extra part of Pension Credit,
called savings credit, for those aged 65 or more which can add up to £20 on top
of the guarantee credit. That system will continue for everyone who reaches
pension age before the new pension begins. But for those who reach pension age
after the new system begins the savings credit will be scrapped. That will save
a lot of money. At the moment 1.6 million people with an income between £103 and
£188 a week who are single (between £166 and £207 for a couple) get some savings
credit. Pension Credit guarantee credit may also be changed and may be set well
below the new state pension.
Will National
Insurance contributions be the same?
The Government has already increased
National Insurance contributions for every employee by 1 percentage point from
April 2011. From April 2012 people who pay into a personal pension and are
contracted out of the state second pension will see a further rise of 1.6
percentage points as contracting out ends for them and they pay the full 12% on
most of their earnings. People in company pension schemes who are contracted out
of the State Second Pension will see a 0.2 percentage point rise to 10.6% in
April 2012. When the new scheme starts contracting out will end for company
schemes too and their standard National Insurance contributions will rise from
10.6% to 12%. At the moment self-employed people do not get state second pension
and their main rate of NI is 9%. In future that may well rise to at least 12%.
These changes will raise many billions of pounds towards the cost of the new
pension.
Will I be able to
defer claiming the new pension and earn extra?
At the moment people who
delay claiming their state pension get it boosted by 10.4% for each year they
defer. The extra pension can be taken as an increase in the weekly pension or as
a lump sum. No decision has been made about whether the same system will apply
to the new pension but it is likely that any extra pension earned by deferring
will be smaller than at present.
More information
You can download the Green Paper A
State Pension for the 21st Century and give your views by 24 June
www.dwp.gov.uk/consultations/2011/state-pension-21st-century.shtml.
You can hear Paul Lewis interview Pensions Minister Steve Webb about the plans here http://news.bbc.co.uk/1/hi/england/9452476.stm
e-mail Paul Lewis on paul@paullewis.co.uk