The ongoing changes to the way Britain’s state pension operates have served to highlight just how much confusion and uncertainty surrounds the system.
This year has seen the introduction of the new, seemingly more generous, flat-rate pension payment, while over the course of the current decade, the age at which both men and women will qualify for their pensions is rising – in the case of women, very steeply indeed.
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The rules regarding who gets a state pension at all have also changed, while the old top-up pension (known as Serps or the State Second Pension) is being phased out altogether.
Broadly speaking, the current upheaval is the result of the UK having an increasing number of older people: more and more of us are reaching retirement age every year, and we are generally living longer than previous generations.
This increases the cost of funding the state pension, forcing the government to change the rules in order to keep expenditure at an affordable level.
What is the state pension?
The UK state pension is, in official language, a “contributory benefit”: it is a payment from the government that is dependent on the level of national insurance contributions made by individuals over the course of their working lives.
Generally speaking, if you pay national insurance for a sufficient number of years, you should be entitled to the full weekly state pension.
But the amount of pension someone is entitled to is not directly linked to how much national insurance they have paid.
For example, workers on low incomes normally pay less national insurance than those earning above average – but as long as you have paid national insurance for the right number of years, you get the full amount.
What are the different types of pension?
Each year, state pensions for current pensioners are paid out of the national insurance fund, which is made up of the money that has been collected from national insurance contributions made by today’s workers.
But the state pension is not like a private pension, in which contributions are invested to provide a sum of money that can be converted at retirement into a regular income.
There is nothing in pensions legislation to say that you are guaranteed a certain level of state pension at a certain date provided you diligently pay national insurance contributions: state pension rates and the age at which people can get it is a matter for the government of the day.
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Many people resent the fact that the state pension is described as a benefit, partly due to the stigma that is sometimes attached to being a recipient of benefits such as Jobseeker’s Allowance.
Instead, such people say, the state pension should be described as a “right” (as indeed it is for those who have made sufficient national insurance contributions).
Earlier this year, a petition was submitted to Parliament calling for the government to stop calling the state pension a benefit. In their response, however, Department for Work and Pensions officials pointed out that numerous pieces of legislation since the Second World War had called the state pension a benefit, and added: “No offence is intended by the use of this term.”
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Today’s challenges and the government’s response
Rising life expectancy in recent decades has resulted in older people making up an increasing proportion of the UK population, and this has made the state pension system more expensive: there are a greater number of individuals reaching state pension age, and they are drawing their pensions for longer and longer.
As national insurance contributions from today’s workers haven’t kept pace with the rising pensions bill, ministers have had to take action to ensure the country can continue to afford to pay its pensioners.
It is possible to do this in a number of ways, for example by reducing weekly payments. Instead, however, successive governments have decided the best approach is to increase the age at which people can start claiming their pensions.
Over the course of this decade, women’s state pension age will rise from 60 to 66, while men’s will go up from 65 to 66 between 2018 and 2020. Pension age will then hit 67 in around 10 years’ time, and will subsequently be linked to increases in average life expectancy.
Accusations of unfairness
The government has come in for strong criticism over the fact that thousands of women are facing long delays in getting their state pensions. Originally, women’s state pension age was due to rise from 60 to 65 between 2010 and 2020 in order to bring it in line with men’s – this was a part of legislation passed in 1995 on gender equality grounds rather than as a result of life expectancy increases.
But the decision to raise the age to 66 by 2020 was only made in 2011, giving many women little time to prepare financially for the prospect of having to wait a year or more than expected to get their pensions.
The WASPI (Women Against State Pension Inequality) campaign was set up in 2015 to address this perceived unfairness, and it has received strong support as well as backing from a number of MPs.
But while there may be a strong moral case for the government to intervene to help those affected if they are in financial difficulties as a result, if Parliament votes to change the state pension age (or even the level of state pension payments), those affected are unlikely to have strong legal grounds to challenge the decision.
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What the future holds
If the state pension system continues to face financial pressures, it is possible that the government may reconsider the current “triple-lock” protection it offers pensioners. This means that state pensions rise every year by at least 2.5% -- increases are greater if price inflation or earnings growth exceeds 2.5%.
Former pensions minister Ros Altmann recently called for the triple-lock to be scaled back, perhaps so that pensions rise in line solely with earnings or price growth every year (whichever is higher) rather than the current 2.5% minimum.
The triple-lock is in place until the end of the current parliament in 2020. But it is conceivable that the next government could choose to dilute this guarantee to some extent.
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Frequently asked question
My second wife is 15 years younger than me, and I have heard she may not qualify for full final salary pension scheme benefits when I die. Is this true?
Most company final salary pension schemes continue to pay income to a surviving spouse after the policyholder dies, typically at 50%. This also applies where people have remarried, but the income may be reduced where the spouse is much younger.If the main policyholder dies, the scheme’s actuary will usually apply a formula that reduces the pension payment where there is a large age gap, in order to reduce the burden on the scheme. This is known as the ‘young spouse’s reduction’, and typically cuts income paid to a surviving husband or wife by 2.5% for each year in age difference beyond ten years.
The larger the gap, the less pension the surviving spouse is initially likely to get, although it should be paid for longer due to their higher life expectancy.One option is to transfer the final salary pension scheme into a ‘money purchase’ pension, giving you greater control, but financial advice is essential.
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