Flat-rate state pension brought forward to 2016

July 22nd, 2013

On the back of the main Budget announcements the Government reaffirmed its objective to introduce a new single tier state pension of £144 a week (in today’s terms) details of which were first released in January in the Government’s long-awaited white paper on pension reform.

Importantly it was announced that the implementation date will now be brought forward to April 2016. This is therefore a year earlier than the date published in January’s white paper which indicated that a new single tier pension would not be introduced until April 2017 ‘’at the earliest”.

To summarise, the introduction of the flat rate pension will mean:

• The new single-tier state pension will only be payable to people who reach State Pension Age (SPA) after 5 April 2016. Current pensioners and those reaching SPA prior to the implementation date will not be affected and will continue to receive their State Pension in line with existing rules.
• A minimum of 7-10 ‘qualifying years’ (years in which sufficient National Insurance (NI) contributions have been paid) will be required to qualify for any state pension. 35 qualifying years will now be required to be eligible for the full state pension (up from the current figure of 30 years)
• The ability to contract-out of the additional state pension via a defined benefit (e.g. final salary) scheme will be abolished.
• Category B pensions will also be abolished, which means that it will no longer be possible for a spouse without a full NI record in their own right to use their spouses NI record to improve their own state pension.

Will I be better or worse off under the new rules?

As part of the transition to a flat-rate state pension individuals yet to reach SPA by 5 April 2016 will have a ‘foundation amount’ calculated, based on their existing National Insurance (NI) contribution record. This figure is broadly the amount of state pension that they will have accrued to that date under the current system. Individuals with a foundation amount equal to or greater than the flat-rate pension will not be able to accrue any further state pension entitlement but they will have their entitlement preserved.

There will be some winners and loser as a result of the changes; and most notably:

Winners

Probably the biggest winners are the self-employed who are not currently able to accrue any entitlement to the additional state pension. This is because (and assuming they would not be entitled to a pension credit top-up) a self-employed person with a full NI record reaching SPA today would only be entitled to a full basic state pension of £110.15 a week – compared to £144 a week if they reach SPA after the implementation date.

 

 

Losers

Individuals with a poor NI record could lose out significantly under the new system. In particular, Widows with a poor NI record could lose out following the death of their husband because they will no longer be able to inherit any of their husband’s state pension.

The abolition of the additional state pension will also hit occupational defined benefit schemes hard. It is estimated that up to six million employees, who currently pay reduced NICs on their earnings between the NI earnings threshold and upper accrual point, will face an effective tax rise of up to 1.4% on that tranche of earnings. Employers will also see their NI liability for each contracted-out employee on the same tranche of earnings rise by 3.4%. This will put more pressure on final salary schemes and a knock-on effect could be more schemes being wound up.

Summary

The move to a single-tier state pension should in the long term greatly simplify the system as a key criticism has been that the existing rules are complex and make it very difficult for individuals to work exactly what state pension they may receive. That said, the transition will clearly not do away entirely with calculating entitlements under the current system.

As always please feel free to contact us for further guidance if you are unsure how the proposals will affect you.