Money
Pensions
Big change in state pensions
The state pension was born 100 years ago this year, and it is about to undergo its biggest reform for 60 years, writes Paul Lewis
The changes will apply to anyone who reaches pension age on April 6, 2010 or later – men born on April 6, 1945 or later and women born on April 6, 1950 or later. Most of the changes mean more money for that lucky post-war generation. But people born before then are not affected. They will be subject to the old rules and their pension will not be improved.
Contributions
Anyone who reaches pension age from April 6, 2010 will need fewer contributions to get a full state pension. At present men need 44 years' contributions or credits and women 39.
That is roughly 90% of a full working life from 16 to pension age. But from April 6, 2010 both sexes will need just 30 years to get a full pension.
Anyone with less than the full amount gets a pro rata pension, so at present a woman with 20 years will get 20/39ths pension, rounded up to a 52% pension. A man with 20 years will get 20/44ths or 46% of the full pension. Anyone with less than a 25% pension gets nothing, so women who have paid nine years and men who have paid 10 get no pension.
Those who reach pension age from April 6, 2010 will get a pro rata pension whatever their contributions. Someone with 20 years will get a two-thirds pension, someone with 15 years a 50% pension. Because there will be no minimum, someone with three years will get a 10% pension and someone with one year will get 1/30th of the full pension.
Caring
Contribution rules will be more generous to people who have spent some of their working lives bringing up children or caring for disabled adults. At present a complex system called "home responsibilities protection" (HRP) means a parent can deduct one year from the 39 or 44 needed for a full pension for each year they receive child benefit for a child under 12. Normally the parent who gets the child benefit gets HRP. But for people reaching pension age from April 6, 2008 it can in some circumstances be given to the other parent.
Some carers who spend at least 35 hours caring for a severely disabled person can claim HRP if they do not get National Insurance credits. HRP began only in 1978 and any time spent caring or bringing up children before that does not count. That complex system is being replaced for anyone who reaches pension age from April 6, 2010. They will get a contribution credit for each week they claim child benefit for someone under 12 or care for a severely disabled person for at least 20 hours a week.
Years of HRP counted between 1978 and 2010 will be converted to years of contributions. The change should mean higher pensions for mothers (and some fathers) and for many carers, especially those who care for less than 35 hours a week or do not get carer’s allowance.
Cuts
At present a male pensioner can claim an extra £54.35 a week added to his pension for a wife under 60 if her weekly income from earnings or a pension of her own is below £60.50. But no new claims will be allowed from April 6, 2010 and any dependant’s additions still being paid in April 2020 will be stopped.
Under the present rules, men who reach 60 but do not work can get a contribution credited for each year until they are 65. They will be phased out and from April 6, 2010 men will only get auto-credits from women’s pension age until 65. Once women’s pension age hits 65 in April 2020 they will disappear altogether.
Unfair deal
Which side of the 2010 cliff edge you fall depends on your date of birth – not when you claim your pension, so if your 60th or 65th birthday is before April 6, 2010 you cannot gain entitlement under the new rules by deferring your claim. If you claim after April 6, 2010 you will still be subject to the old rules. People with identical work records, one born just before April 6, 1950 (or 1945 for men) and one born after, will get very different pensions. There may even be twins – one born on April 5 just before midnight and one born minutes later on April 6 – who will fall into the two different regimes. The Government said it would not do anything about this problem, which it believes is too complex and expensive to resolve.
However, Saga Magazine has learnt that the House of Lords will attempt to force a change in the summer. We'll keep readers informed.
Another unfairness is that many people will have paid enough contributions to get a full pension long before pension age, but if they are in work NI contributions must still be paid. For example, someone born in 1956 who starts work at the age of 18 will have paid enough contributions to get a 100% state pension by the time they are 48. But if they work until 65 they will have to carry on paying NI contributions for another 17 years until they reach 65. The NI contributions do not have to be paid once you reach pension age.
Raising pension age
Many people will in future have to wait more years before they receive their state pension, because we are now living for longer. Our life expectancy is growing by about three months for every year that passes, and the longer we live the more it costs to pay a pension for life. So state pension age will rise slowly from April 6, 2010 until it reaches 68 for those born on April 6, 1978 and later.
Ladies first
Pension age for women born between April 6, 1950 and April 5, 1955 will rise from 60 to 65 in stages. Women who turn 60 from April 6, 2010 to May 5, 2010 will all reach pension age on May 6, 2010. Those who reach pension age from May 6, 2010 to June 5, 2010 will reach pension age on July 6, 2010. After that, for each month that passes, pension age will rise by two months, falling on the 6th of odd-numbered months.
The process will end with women who reach 60 between March 6, 2015 and April 5, 2015 whose pension age will be almost five years later on March 6, 2020. After that, the pension age for men and women will be their 65th birthday.
Altogether now
Men and women born from April 6, 1955 to April 5, 1959 will reach pension age at 65. Then the age will be gradually raised for everyone to 66, where it will stay for those born April 6, 1960 to April 5, 1968. Two further rises will push it up to 67 from April 2036 and to 68 from April 2046. Find your pension age by entering your date of birth at www.thepensionservice.gov.uk/resourcecentre/statepensioncalc.asp or table 1 in Pensions for Women, which can be downloaded from www.thepensionservice.gov.uk/pdf/pm/pm6feb08.pdf. Most of the changes also apply to men.
The minimum age for pension credit and winter fuel payment is currently 60 for men and women. But the qualifying age for both will rise with women's pension age. So men will only be able to get either if they have reached the pension age for women when they claim.
Raising pension age saves the Government money in two ways. First, it pays pensions to fewer people each year and for less time. Second, it collects NI payments for longer from those in work. Not that it actually needs the money. By 2010 the NI fund will have a surplus of more than the cost of paying pensions and other benefits for a whole year.
* Paul Lewis is the editor of Saga Magazine's Money News section and the presenter of BBC Radio 4's Moneybox. This article first appeared in the May 2008 edition of Saga Magazine. Paul's opinions are his own and for general information only. Always seek independent financial advice.
