STATE PENSION CHANGES How the state pension is changing How the state pension is changing The government is planning radical changes to the state pension. The changes aim to simplify the system so that its easier for people to understand how much state pension they will get. Written by Melanie Tynan on 24 July 2013 Share on FacebookShare on TwitterShare via Email In this guide A flat-rate state pension How the state pension will be calculated Transition arrangements Contracting out will stop Pension Credit changes State pension will increase in line with earnings State pension age based on longevity Other changes The state pension has been around since 1948 when it was introduced as a flat-rate pension. Since then it has been tinkered with, and radically changed too, at various points in its history. The result is an extremely complex system that most people, even the experts, struggle to understand. In January 2013 the government produced a White Paper outlining its proposals for a radical overhaul of the system which will return the state pension to its original form - that of a flat-rate pension. Assuming the changes are agreed by parliament they should take effect from April 2016. The changes will affect everyone who reaches state pension age on or after the implementation date. For the purposes of this guide well assume the changes will take effect from 6 April 2016. If you reach state pension age before that date, your pension will be calculated and paid under the current system. You cannot make yourself eligible for the new single-tier pension by deferring your state pension. A flat-rate state pension From 2016 there will be a weekly flat-rate pension of around £144 in todays money. The actual amount will be decided nearer the time. This will replace the current system of the basic state pension and the earnings-related additional state pension (known as S2P and previously known as SERPS). The change will mean a much simpler system. Youll build up entitlement to the state pension based simply on how many years of National Insurance contributions or credits you have. The amount you earn will no longer have any bearing on how much state pension you get. How the state pension will be calculated To qualify for the full state pension youll need to have 35 years of National Insurance contributions or credits. Under the current system you need just 30 years to get a full state basic pension. If you have less than 35 years youll get a proportion of the full state pension. For example, if you have 25 years of contributions, youll get 25/35ths of the full state pension. For each additional year of National Insurance contributions or credits, youll add £4.11 a week to your state pension (assuming the state pension is £144 in todays money). Once youve got 35 years of contributions or credits you wont be able to increase your state pension any further. So, just as with the current system, you could find yourself working and paying National Insurance but not actually seeing an increase in your state pension. There will be a minimum contribution level below which you wont receive any state pension at all. The government says this will fall somewhere between seven and 10 years of National Insurance contributions or credits. It will decide on the exact number of years nearer the time. Transition arrangements So the new single-tier system is definitely much simpler than the current system. Anyone embarking on their working life will have a much easier system to deal with. But for everyone else things are a little more complicated as theyre caught in the transition period between the two systems. The government has designed a transition process which translates your National Insurance record as at April 2016 into an amount under the new single-tier pension - the foundation amount. This transition process involves two steps. Step One Your National Insurance record will be valued under the rules of the single-tier system as at April 2016. For example, if you have 30 years of National Insurance contributions or credits your single-tier valuation will be 30/35ths x £144 (£123.43). As happens under the current system, if you have been contracted out at any time then an amount will be deducted from your single-tier pension to reflect the private pension youve built up as a result of paying lower National Insurance contributions or having some rebated when you were contracted out. So in our example above, your single-tier valuation would be somewhat less than the £123.43 if you had any periods of contracting out. Step Two A second calculation is then performed to see what your state pension would be under the current scheme, based on your National Insurance record as at April 2016. If youre entitled to a higher amount under the current system than the single-tier valuation - because youve built up additional as well as basic pension- then youll receive that higher amount. This will become what is known as your foundation amount. Otherwise your single-tier valuation will be your foundation amount. These transitional rules mean that you will not lose any state pension that you have already built up under the current rules, but you could end up with less under the new system that you had expected to receive had the current system continued. Example One Bob has 45 years of National Insurance contributions. He was contracted out for around 15 years during that time. Under the single-tier valuation he would get, 35/35ths x £144 minus a deduction for the time he was contracted out, reducing his single-tier pension to around £133 a week. Under the current system valuation he is due to get a state pension of £160. Because his current system valuation is higher than the single-tier valuation, his current system valuation becomes his foundation amount. When he reaches state pension age, hell get the full £144 plus a protected payment of £16 a week. The £144 will rise at least in line with earnings. The protected payment will rise each year in line with CPI only. A rise in line with earnings is usually more generous as earnings typically outstrip the rise in prices. Because Bobs foundation amount is higher than the full level of the single-tier pension, he cannot build up any more extra pension after April 2016. Example Two John has 10 years of National Insurance contributions. He has spent some time contracted out. Under the single-tier valuation he is entitled to £35 a week which reflects his National Insurance record and a deduction for the time he was contracted out. Under the current system he would get a higher valuation of £49. So £49 a week becomes his foundation amount. As his foundation amount is less than £144, he is able to build up extra pension at the rate of £4.11 for every extra qualifying year of National Insurance contributions, up to a maximum of £144. Example Three Jane has 36 years of National Insurance contributions. Under the single-tier valuation she is entitled to, 35/35ths x £144 = £144 a week. Under the current system, the maximum she will get is the full basic state pension of £107 a week. Thats because shes been self-employed for all her working life and so has not built up any entitlement to the additional state pension. In Janes case, her single-tier valuation is higher than the current system valuation and so the £144 becomes her foundation amount and this is the amount shell get when she reaches state pension age. As her foundation amount is already £144, she will not be able to build up any more state pension after April 2016. Contracting out will stop As there will be no additional state pension, contracting out will stop. It has already been abolished for defined contribution (money purchase) pensions. From 2016 it will also stop for those in defined benefit (final salary and career average) schemes. If youre in a contracted out final salary scheme, youll see your National Insurance contributions rise as a result. Employers will also be hit by higher National Insurance contributions. Private sector employers will be able to reduce your benefits or increase your contributions to offset this additional cost to them. Public sector employers will not be able to make these changes. Pension Credit changes According to government figures 4 in 10 pensioners are currently eligible for the means-tested benefit known as Pension Credit. However a third of those do not claim it. Pension Credit consists of two parts; the guarantee credit and the savings credit. The guarantee credit simply aims to ensure that pensioners have a minimum level of income by topping up their weekly income to a set amount. This will remain in place. The full weekly state pension amount will be set above this threshold meaning that fewer people will need to deal with the complicated process of claiming the benefit. Currently the guarantee credit tops up your weekly income to £145.50 for an individual or £222.05 for a couple (2013/14 figures). The savings credit part of Pension Credit will be abolished. State pension will increase in line with earnings The government says it will increase the flat-rate pension in line with earnings. It will decide nearer the time whether it will use the triple lock system which would guarantee that the pension would rise by the higher of earnings, CPI or 2.5%. State pension age based on longevity Any increase to state pension age will be based on life expectancy figures. It will review the state pension age every five years and will have to give 10 years notice of any changes. Other changes There are a range of other changes the government is planning to bring in: You will no longer be able to get a lump sum for deferring your state pension. Instead youll be offered a weekly increase to your pension. This could be a lot less generous than the current system which gives you a 1% increase for every five weeks you defer. You will only be able to build up a state pension in your own right. In other words you wont be able to derive or inherit the flat-rate state pension from your spouse or civil partner. There will however be transitional arrangements in place for existing additional state pension rights and for women who have paid reduced rate National Insurance contributions. If you retire in the current system you will be able to continue to qualify for a pension based on your spouse or civil partners pension. But any contributions or credits your spouse or civil partner builds up after April 2016 will not be taken into account when calculating your pension. The flat-rate state pension will not be able to be shared under divorce pension sharing arrangements. But existing sharing orders will be honoured and the rules will allow for sharing of existing additional state pension rights.
Posted on: Wed, 06 Nov 2013 17:29:56 +0000
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