The new state pension will cost no more than the present system
The state pension will be simpler and more certain under Government plans – something that Saga has advocated for many years. A lot of clutter will be swept away, leaving a straightforward, single-tier state pension of £144 a week at today’s prices. It might have risen to £155 or more when the scheme starts.
Government figures are based on an assumption that the new state pension will start on April 6, 2017. It will apply to everyone who reaches state pension age from that date, which would be men born on April 6, 1952 or later and women born on July 6, 1953 or later. Everyone who is older than that will get the current pension under the current rules.
Women born between April 6, 1952 and July 5, 1953 will be denied the new pension. Many have already seen their pension age raised and feel very hard done by.
No extra 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 Sixties; Category D pensions paid to people aged 80 or over with no National Insurance record; pensions paid to married women on their husband’s contributions; 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 to everyone of pensionable age with at least 35 years’ NI contributions.
At the moment, you get a full pension of £107.45 if you have 30 years’ NI 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. People who’ve paid NI for fewer than 10 years will probably get nothing.
The pension will be paid to individuals on the basis of their own NI contributions. Therefore a couple who both have 35 years’ contributions will get £144 each. A spouse or civil partner will not be able to claim a pension based on their partner’s contributions. In future that could leave some people with no pension at all. To get the contributions, you will have to work and be paid 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. Conditions differ, however, and may not apply in all circumstances. Those rules will continue.
The Government predicts that 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 that the part of pension credit called ‘savings credit’ will be scrapped. That will mean much less help for some people with an income at or above £144 a week than they get at present. These changes won’t affect people who reach pension age before the new scheme begins. However, the Government is already reducing pension credits paid to those with an income above about £143 a week (single) or £217 (couple).
Win some… lose some…
The winners under the new system will be those who now qualify for a state pension that is less than £144. That will include many self-employed people who do not pay into a state second pension and those on low incomes who get very little additional pension. NI contributions for self-employed people may be changed to bring them in line with those paid by employees.
However, many people are already entitled to a bigger state pension than the new single-tier £144 a week. If they have SERPS, S2P and a 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 reached pension age in 2011 was £145 from basic pension and SERPS.
A complex system will ensure you do not get a lower state pension than you would under the current rules, while allowing people to build on their current pension to get the full single-tier pension.
How it will work
At the date of change, everyone 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 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 in line with prices. When an 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. 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 to 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. 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 preserved foundation amount will be reduced, roughly by the SERPS/S2P they would have got. However, they will still be able to earn the full £144 if they pay enough extra years of NI contributions.
Existing rules on paying the state pension abroad will remain. It will be uprated each year in the EU and the 20 or so countries where there is an agreement to do so.
Everywhere else it will be frozen at the level it was first paid abroad.
* Read Paul Lewis's money articles every month in Saga Magazine.