Money
Pensions
The nuts and bolts of the UK pension plan changes
Find out about automatic pension enrolment, the squeeze on credits and more
The earnings link
The second major change to the pension will link it to earnings rather than prices. Earnings rise faster than prices, so that will increase the value of the state pension in future, adding another £30 or so in 20 years' time.
If the link had not been ended in 1980, the basic pension would now be £142 a week and all these debates about improving the state pension would be unnecessary.
The Government has set a target date to make this change from April 2012, "subject to affordability and the fiscal position", but warns that it might be delayed to "the end of the next Parliament", which could be as late as 2015.
The shrinking second pension
Long seen as the poor cousin of the basic state pension, Barbara Castle's SERPS, now called state second pension or S2P, can provide someone retiring this year with £146 a week - though most get around a tenth of that.
Eventually it will be changed from an earnings-related pension to one that is flat-rate and worth a maximum of £65 a week, and it will continue to be raised in line with prices, not earnings.
Any SERPS or S2P already earned will still be paid, but for every year worked from April 2008 the pension earned will become more and more flat-rate. It will eventually be worth around £1.40 a week for each full year paying (or being credited) into S2P.
Squeeze on credits
One of the principles behind the reforms is to reduce the number of pensioners entitled to means-tested top-ups of the state pension. About half of all pensioners could get extra money through pension credit, though as many as two million of them do not claim it.
The Government has decided to change the arithmetic, so that the smaller amounts of pension credit given to those with their own incomes on top of the state pension will not rise as rapidly as had been planned.
The change will start slowly in April 2008 and accelerate from 2015. The change will mean lower rises in pension credit for more than two million people compared with now.
Automatic enrolment
The Government also set out plans to encourage everyone in work to save for a pension on top of what the state provides. At present, many employers do not offer a pension scheme, and even when they do many employees do not join it.
From 2012 both those matters will be tackled. First, every employer who does not provide a company pension already will have to do so.
Normally this will be through a new national private pension scheme called a 'personal account'. Costs are likely to be kept low and choices will be limited.
Second, everyone in work aged between 22 and pension age who earns more than around £5,000 a year will be automatically enrolled in the company scheme or the personal account when they begin working.
They will have the right to opt out of the scheme, but evidence shows that if joining is automatic, far more people become members of a scheme. People over pension age will not be automatically enrolled but will be able to join the scheme up to the age of 74.
Under the new personal account, 8% of pay between around £5,000 and £33,000 would go into the scheme. This would be made up of 3% from the employer, 4% from the employee and 1% from basic rate tax relief. Either party would be free to contribute more - up to certain limits which have not been announced yet.
The employer contributions will be phased in from 2012 to 2014 and small employers will get help with the costs in the early years. Self-employed people will also be able to save into the personal account - and so will non-employed people up to a limit of £3,600 a year.
Written by Paul Lewis
