State Pension Reform

June 28th, 2011

Basic state pension and pension credit increases
From April 2011 there is a ‘triple guarantee’ that the basic state pension will rise by the highest of:
•    National average earnings
•    Prices – the percentage increase in the cost of living that year; and
•    2.5%
In 2011/12, the highest of these 3 measures is the retail price index (RPI) and as a result the Basic State Pension will increase by £4.50 to £102.15.

It should be noted though that from 6 April 2012, the consumer price index (CPI) will replace the retail price index (RPI) for increases thereafter, and CPI historically has nearly always been lower than RPI.

If you qualify for a basic state pension, you may also be eligible for pension credit to top up your pension income, and from April 2011 the annual increase in pension credit will be at least the same cash increase as the basic state pension.

Pensioners on a low income who receive pension credit will therefore receive a £4.75 increase in their guarantee credit this year.

What do you need to do?

You do not need to do anything. If you are receiving a state pension, this will be increased automatically and the Department of Work and Pension should write to you about this.

State pension age increases

The age from which the basic state pension and the additional state pension can currently be taken is 65 for men and 60 for women.

Between 2010 and 2018, however, the State Pension Age (SPA) for women is increased on a sliding scale so that Women’s SPA will be 65 from November 2018.

Following the equalisation of the SPA in 2018, the SPA for both men and women will then increase to 66 between December 2018 and April 2020.

Furthermore, the government is also now considering the timetable for future increases to the SPA from 66 to 68, and indicated in the March 2011 Budget that it intends to bring forward proposals to manage future changes in the SPA more automatically by increasing it in line with life expectancy.

Based on Office for National Statistics data, the increase in male life expectancy at age 65 over the last 30 years (between 1981 and 2011), was 5.3 years.

So, if life expectancy continues to rise at this rate over the next 30 years as-well, SPA could rise by another 5 years on top of the 1 year increase to 66 already due to take effect from 2010, in which case the SPA for someone born in 1970 would be 71 and young people leaving school today would have a SPA of over 75 (!)

What do you need to do?

You do not need to do anything. If you are reaching State Pension age, you should receive a pension claim pack.

The £140-a-week flat rate state pension

As you will have no doubt heard on the news and read in the newspapers, the Government have recently proposed a £140 a week flat rate state pension, which is above the current pension credit minimum guarantee, payable to everyone with a sufficient national insurance record.

Such a move, which would spell the end of the additional state pension and pension savings credit ‘mean-testing’ should significantly simplify matters and also encourage more low earners in particular to save more.

As Iain Duncan-Smith put it ‘’ Too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing. We have to change this and send out a clear message across both the welfare and pension systems that  you will be better off in work than on benefits, and you will be better off in retirement if you save.’’

When will the changes happen?

If the plans go ahead as proposed, they are likely to come into force during the next Parliament – which is likely to mean 2015 at the earliest.

It is estimated that the £140-a-week pension will actually be worth around £155 a week if it is introduced in 2015.

I’m already retired. Will this affect me?

If you’re one of the 12 million people already drawing your state pension, it will not change, so you’ll miss out on the new £140 flat rate. Critics say this will create a cliff edge between current and future pensioners

Who will benefit?

Anyone who reaches their state pension age after the new system is introduced and has paid (or been credited) with at least 30 years of national insurance contributions will receive at least the full weekly flat rate.

Women and the UK’s 3 million self-employed, who lose out under the current system, will be the main winners

Who will lose out?

Higher earners with long working lives will be worse off as they will no longer be able to build up an additional entitlement over and above the 30 qualifying years.

Will I lose any additional state pension I’ve already built up?

No. Those people who have built up an entitlement to an additional state pension (SERPS and/or S2P) which takes them over the £140 threshold before these changes take effect will keep these benefits. So, if the additional state pension and new full state pension combined was £160 a week, this is what you will receive.

What if I won’t have 30 years’ contributions?

The amount you get will be linked to how many years of national insurance contributions you have built up, although the minimum to qualify for any state pension will be 7 years’ contributions, which is worth £32.70 a week in today’s terms.

So, someone with 15 years of national insurance contributions would receive half of £140 in today’s terms i.e. £70 a week.

Will the self-employed get the same state pension?

Yes. Self-employed people who do not currently build up any entitlement to the additional state pension should therefore benefit from the proposed change.

If I have been contracted out of the additional state pension, will this affect my state pension?

In order to ensure that people who have built up ‘contracted-out’ rights don’t benefit unfairly, the Government have said that any income they receive from those pensions as a result of being contracted-out will be deducted from their weekly state pension.

So, if someone who would otherwise be entitled to a state pension of £140 a week builds up a pension of £30 a week as a result of being contracted-out, they would receive £110 a week from their state pension instead.