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Earlier this year the Government set out plans to reform State Pensions and these have now started to be considered by Parliament in the Pensions Bill, with the first debate (Second Reading) in the House of Commons on 17 June, after which a committee of MPs will look in detail at the plans.
But what does the proposed new single-tier State Pension really mean and how will if affect future pensioners?
Who wins and who loses with the new reforms?
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.
When the single tier pension is fully introduced it will have the following features:
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 outIn 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.
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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The pension calculator is a pre-retirement planning tool and can help you plan ahead.
The Pension Service provides details of state pensions‚ including forecasts and how to claim your pension.
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