State Pension reform

SINCE THIS PIECE WAS WRITTEN THE START DATE FOR THE REFORMED STATE PENSION HAS BEEN BROUGHT FORWARD TO 6 APRIL 2016. THAT MEANS IT WILL APPLY TO ANYONE WHO REACHES STATE PENSION AGE ON 6 APRIL 2016 OR LATER WHICH IS MEN BORN 6/4/51 OR LATER AND WOMEN BORN 6/4/53 OR LATER. OTHER DETAILS MAY CHANGE BEFORE IT IS INTRODUCED.

The state pension will be simpler and more certain under Government plans finally published in the New Year. Will you be a winner or a loser?

The State Pension will become simpler and more certain under reforms announced by the Government. A lot of 20^th century clutter will be swept away leaving a simple, single tier State Pension of £144 a week at today’s prices – perhaps £155 or more when the scheme begins, probably in 2017. The Government will not give a definite date but all its figures are based on the assumption that the new State Pension will start on 6 April 2017. It will apply to everyone who reaches State Pension age from that date which would be men born 6 April 1952 or later and women born 6 July 1953 or later. Everyone who is older than that will get the current pension under the current rules. You will not be able to sneak into the new regime by deferring your claim until after that date. It will depend strictly on your date of birth. More than 400,000 women born between 6 April 1952 and 5 July 1953 will be denied the new pension even though men of the same age will get it. Many have already seen their pension age raised and feel very hard done by.

Nil cost
The new State Pension will cost no more than the present system. So half a dozen existing pensions will vanish – basic retirement pension, additional pension called SERPS and State Second Pension (S2P), graduated retirement benefit from the 1960s, pensions paid to married women on their husband’s contributions, Category D pensions paid to people aged 80 or more with no national insurance record, and the age addition of 25p a week paid at the age of 80. In their place will be a State Pension paid at one rate at pension age to everyone with at least 35 years’ National Insurance contributions. At the moment you get a full pension of £107.45 if you have 30 years’ National Insurance contributions – that was recently reduced from 44 for men and 39 for women. From 2017 people with fewer than 35 years’ contributions will get less than £144. For example, 25 years will earn 25/35ths of the full amount. But people with fewer than ten years’ contributions will probably get nothing.

The pension will be paid to individuals on the basis of their own National Insurance contributions. So a couple where both have 35 years’ contributions will get £144 each. A spouse or civil partner will not be able to get a pension based on their partner’s contributions. That could leave some people with no pension at all. To get the contributions you will have to work and earn above the lower earnings limit (currently £107 a week) or get them credited. Credits are given to people who are carers, parents, sick, on maternity/paternity leave, or looking for work. But conditions differ and may not apply in all circumstances. Those rules will continue. The Government predicts very few people who have spent their adult life in the UK will not qualify for a pension and more than 80% will get a full one.

The Government also plans to change the means-tested pension credit top up. In future there will be no means-tested help for those with an income above the full State Pension. The details have not yet been published but we do know the part of pension credit called ‘savings credit‘ will be scrapped. That will mean significantly less help for some people with an income at or above £144 a week than they get under the present scheme. These changes will not affect people who reach pension age before the new scheme begins. But the Government is already reducing the pension credit paid to people with an income above about £143 a week (single) or £217 (couple).

Winners and losers
The winners from the new system will be people who currently get a State Pension which is less than £144. That will include many self-employed people who do not pay into state second pension and those on low incomes who get very little additional pension. But National Insurance contributions for self-employed people may be changed to bring them in line with those paid by employees.

Many people are already entitled to a bigger State Pension than the new single tier £144 a week. If they have SERPS, S2P and graduated pension of more than £36.35 then they would be better off under the old system. The average pension paid to a man who reach pension age in 2011 was £145 from basic pension and SERPS.

The Government has set up a complex system to ensure people do not get a lower State Pension than they would under the current rules while still allowing people to build on their current pension to get the full single tier pension.

At the date of change everyone in the state system will have their entitlement assessed under the current rules – entitlement to basic pension with 30 years’ contributions and any additional pension. That entitlement will be called their ‘foundation amount’. If that is more than £144 then the extra will be called their ‘protected payment’. Each year the basic element up to £144 a week will rise in line with the State Pension and the protected payment with prices. When the individual reaches pension age they will get the uprated foundation amount. This mechanism is intended to ensure that people will be no worse off under the new scheme than they were under the old scheme.

People who already have 30 to 34 years’ contributions and were expecting a full pension under the old system will still get more under the new scheme - 30/35ths of the new pension which would be about £123. Anyone will be able to get extra contributions if they work and will also be able buy contributions back to 2006/07. Each year will bring a pension of more than £4 a week index-linked for life so it will be well worth doing.

Similar rules will protect people who would ‘inherit’ SERPS/S2P when their spouse dies. No inheritance of state pension on death or divorce will be possible under the new system but rights earned at the date of change will be preserved – details awaited. And a wife (or other spouse or partner) who would get a dependant’s pension will have that entitlement preserved.

More than six million people who pay into a workplace pension that is related to their final salary will face a double blow. First, their contributions will rise from the date of change by 1.4% of their pay – a maximum increase of around £500 a year. Second, when they reach pension age their ‘foundation amount’ (see above) will be reduced, roughly by the SERPS/S2P they would have got. But they will still be able to earn the full £144 if they pay enough extra years of contributions.

The existing rules on paying the State Pension abroad will not be changed. It will be uprated each year in the EU and 20 or so other countries where there is an agreement to do so. Everywhere else it will be frozen at the level it was first paid abroad.

e-mail Paul Lewis on paul@paullewis.co.uk