What the new State Pension reforms mean for you

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In 2013, the Government set out plans to reform State Pensions and then published the Pensions Bill. This has been debated and is now being considered by Parliament
in the House of Commons and started to be discussed in the House or Lords in December 2013.

But what does the proposed new single-tier State Pension really mean and how will if affect future pensioners?

 

Read our analysis of what the 2014 Budget means for you

Below we summarise proposals as they're currently set out in the Pensions Bill. However these need to be agreed by the House of Commons and the House of Lords so changes may be made:

  • A single-tier, flat-rate State Pension. This will replace the basic and additional pensions for people reaching State Pension age from 6 April 2016 onwards.
  • An increase in State Pension age from 66 to 67 between April 2026 and April 2028 and provision for 5 yearly reviews of State Pension age.

Who wins and who loses with the new reforms?

Single-tier State Pension

Why is a flat-rate pension being introduced?

The existing system is complex, has high levels of means-testing and produces inequality, eg women tend to have lower State Pensions than men.

The reforms are intended to address these issues and the aim is to introduce a simpler, fairer system where people have a clearer idea about what the state will provide making it easier to plan their retirement savings.

The Government has said that the new pension will apply to people who reach State Pension age after the changes are introduced so will not affect people who are already pensioners.

The new single tier pension will affect people reaching State Pension age from 6 April 2016, as announced in the 2013 Budget.

Key features of the single-tier pension

When the single tier pension is fully introduced it will have the following features:

  • The current basic and additional pensions will be replaced by a single pension worth around £144 a week in today’s prices.
  • The full single-tier State Pension will be based on 35 years National Insurance (NI) contributions or credits.
  • As with the current basic pension, the law will require this to be uprated annually in line with earnings, but the aim is to increase it in line the ‘triple lock’ that is the higher of earnings, prices, or 2.5% (again as with the current basic State Pension).
  • To qualify for any State Pension, people would need a minimum number of contributions – the model in the White Paper is based on 10 years. If this is the minimum, then someone with less than 10 years would receive no pension, while someone with between 10 and 34 years' contributions would receive a proportion of the pension.
  • Contracting out will end. This will only affect people in defined benefit occupational schemes as it has already ended for people in defined contribution schemes.
  • It will be an individual entitlement, so there will be no special rules for people who are married, bereaved or divorced.
  • Pension Credit and other means-tested benefits will continue to provide a safety net, but the savings credit element of Pension Credit will be abolished.
  • The proposals are intended to be cost neutral every year – meaning that spending on State Pensions will remain the same – so there will be winners and losers as compared to the current system.

The transitional period

Although in the future everyone with at least 35 years of contributions would receive £144 from their State Pension it will take some time to move to this position. During the transitional period some people will receive a State Pension which is higher than £144 a week and some people will receive less.

When the single-tier pension is introduced anyone who has already built up a NI record will have this translated into an amount described as a ‘foundation amount’.

State Pension already built up will be protected. If the 'foundation amount' is more than the level of the single-tier pension, any amount over £144 will be protected and paid in addition to the single-tier pension once an individual reaches reach State Pension age.

Contracted out
In some instances, people will have been contracted out of the additional State Pension and will have been paying lower NI contributions, while building up a private pension instead.

If this is the case, then those people will start to build up years of single-tier State Pension from 2016 to State Pension age.

However for some people the final State Pension will be less that £144 if, for example, they had been contracted out of the additional State Pension and paying lower NI contributions for many years. 

Transitional help from means-tested support and inheritance

Currently Housing Benefit and Council Tax Benefit - which provide means-tested help with rent and council tax - are paid at higher rates to people aged 65.

This is linked to the level of savings credit. Savings credit will be abolished for people reaching State Pension age after the single tier is introduced.

However as a transitional measure, for the first 5 years, there will be additional support with rent and council tax for those who would have received higher support with these costs had savings credit still been in place.
 
Although the single-tier pension will be an individual entitlement there will be some provision for inheritance of protected payments and additional State Pension already built up.

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