The United Kingdom has one of the most complex state pension systems in the world. There is the basic state pension and, for employees only, an additional earnings-related pension. Both are overlaid with two means-tested benefits; Pension Credit and Savings Credit. To quote the White Paper, the structure means ‘that many people do not have a clear starting point from which to plan and save for their retirement’.
The solution proposed by the White Paper is in five parts.
- Introduce a single tier pension of £144 a week in today’s terms, marginally above the level at which any Pension Credit is payable.
- End accrual to the additional pension (the state second pension [S2P]) and contracting out.
- Base entitlement on the individual, ending the right to inherit or take credit for the pension of a spouse/civil partner.
- Scrap the Savings Credit for new pensioners.
- Review (and probably increase) the state pension age (SPA) every five years.
To gain the full £144 a week pension you would need a 35-year record of national insurance contributions and/or credits, compared with the 30 years currently required for the basic state pension. A minimum period to receive any pension will be set – probably at ten years. At present just one year’s record will earn some state pension.
The proposed starting date for the new pension regime is April 2017, ‘at the earliest’, and if you reach your SPA before then, you will be unaffected. Given the intricacies of the existing system, it is not surprising that there are complex transitional rules to deal with state pension benefits accrued before the start date.
The White Paper admits that ‘single-tier reforms have been designed to cost no more overall compared to the existing pension system’ and the Department for Work and Pensions’ own projections suggest that in the long-term the cost will be less. While there will be many people who will gain from a single tier pension, particularly those who are low paid, the lower overall expenditure means there may be more losers than winners.
So while the proposals are a simplification, they are no substitute for private provision.
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