On 14th January 2013 the Government published a White Paper setting out proposals for State Pension reform for people reaching State Pension age in the future. (The paper does not include any plans to change provision for current pensioners).
The main changes are:
• A single tier flat rate State Pension. This will replace the basic and additional pensions for people reaching State Pension age in the future (2017 at the earliest).
• An increase in State Pension age from 66 to 67 between April 2026 and April 2028 and provision for 5 yearly reviews of State Pension age.
Single tier State Pension
The White Paper says that the system is complex, has high levels of means-testing and produces inequality – for example women tend to have lower State Pensions than men. The reforms are intended to address these issues and the aim is to introduce a simpler, fairer system where people have a clearer idea about what the state will provide making it easier to plan their retirement savings.
The Government has said that the new pension will apply to people who reach State Pension age after the changes are introduced so will not affect people who are already pensioners. It is planned to be introduced in the next Parliament – the earliest date for introduction will be 2017. (Note that it is the date someone reaches State Pension age that will be important– regardless of whether they actually draw their pension then).
The proposals are summarised here and brief information is given about the current system in the appendix below.
When the single tier pension is fully introduced it will have the following features:
• The current basic and additional pensions will be replaced by a single pension worth around £144 a week in today’s prices.
• The full single tier State Pension will be based on 35 years National Insurance (NI) contributions or credits.
• As with the current basic pension the law will require this to be uprated annually in line with earnings but the aim is to increase it in line the ‘triple lock’ that is the higher of earnings, prices, or 2.5% (again as with the current basic State Pension).
• To qualify for any State Pension, people would need a minimum number of years’ contributions – this will be between 7 and 10 years although the modelling in the White Paper is based on 10 years. If this is the minimum then someone with less than ten years would receive no pension while someone with between 10 and 34 years contributions would receive a proportion of the pension.
• Contracting out will end. This will only affect people in defined benefit occupational schemes as it has already ended for people in defined contribution schemes.
• It will be an individual entitlement so there will be no special rules for people who are married, bereaved or divorced.
• Pension Credit and other means-tested benefits will continue to provide a safety net but the savings credit element of Pension Credit will be abolished. (Savings credit provides extra support to people with modest levels of savings or pensions.)
• The proposals are intended to be cost neutral every year, meaning that spending on State Pensions will remain the same – so there will be winners and losers as compared to the current system.
The Transitional Period
Although in the future everyone with at least 35 years of contributions would receive £144 from their State Pension it will take some time to move to this position. During the transitional period some people will receive a State Pension which is higher than £144 a week and some people will receive less.
When the single tier pension is introduced anyone who has already built up a NI record will have this translated into an amount described as a ‘foundation amount.’ State Pension already built up will be protected. If the foundation amount is more than the level of the single tier pension any amount over £144 will be protected and paid in addition to the single tier pension once the individual reaches State Pension age.
Where people have been contracted out of the additional State Pension they will have been paying lower NI contributions and building up a private pension instead of additional State pension. People who were previously contracted out will start to build up years of single tier State Pension from 2017 to State Pension age. However for some people the final State Pension will be less than £144 if, for example, they had been contracted out of the additional State Pension and paying lower NI contributions The changes will only affect people reaching State Pension age from 2017 so will not alter the situation for people who are already pensioners.
State Pension Reform, Age UK’s Views
For future pensioners Age UK supports the aim of a single tier state pension above the basic Pension Credit rate which would provide a fairer, simpler system and particularly benefit those with low lifetime earnings due to low pay or caring responsibilities. This is an important complement to automatic enrolment into private pensions which started to be rolled out at the beginning of October 2012. Together, these reforms should ensure that more people can achieve an adequate income in later life and make it easier to plan for retirement during their working life. We recognise that some groups will do less well out of the reforms although at least there should be greater clarity about what the state will provide.
However we know that many current pensioners with low pensions will be very disappointed that they will not benefit from the single tier State Pension. Age UK believes that current pensioners should not be overlooked in reforms and will continue to press for improvements in the position of those who have already retired. With 1.7 million older people currently living in poverty, we want the government to set out a timetable for the reduction and abolition of pensioner poverty and a strategy for achieving this.
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