State pension reform

STATE PENSION REFORM

The UK Government brought in a new State Pension Age system on 6 April 2016. The previous system was over complicated and many people were unable to keep track of what they should receive from the State in Basic State PensionBasic State PensionThe Basic State Pension is a regular payment from the government that you can get when you reach State Pension age. To get it you must have paid or been credited with National Insurance contributions. The most you can currently get is £110.15 per week.

The basic State Pension increases every year by whichever is the highest:
- earnings - the average percentage growth in wages (in Great Britain)
- prices - the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
- 2.5%

(Source: UK Government)
and Additional State PensionAdditional State PensionThe Additional State Pension is an extra amount of money you could get with your basic State Pension. It’s based on your National Insurance contributions.

How much you get depends on your earnings and whether you’ve claimed certain benefits. There is no fixed amount like the basic State Pension.

You get the Additional State Pension automatically, unless you’ve contracted out of it.

The Additional State Pension is paid with your basic State Pension. It normally increases every year by prices - the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI).

(Source: UK Government)
once they reach State Pension Age.

The new State Pension enables individuals to be much more aware of what they need to save for a comfortable retirement.

The new State Pension is set above the basic level of means-tested support. It is available to those who have at least 10 years of National Insurance Contributions. People will receive state pension based on their own history of National Insurance Contributions and will need 35 years of contributions to receive the full amount.

If an individual’s pension scheme was contracted out of additional state pension then that individual may see a reduction in their initial State Pension amount to reflect any period where the individual will have paid lower National Insurance contributions and accrued benefits in a workplace pension instead.

WHAT THIS MEANS FOR OUR MEMBERS

The new State Pension has resulted in the end of contracting out of the Additional State Pension and the National Insurance rebate provided to contracted-out employers and employees. This will increase scheme costs for employers and increase the tax paid by employees. The Government has compiled some useful factsheets for employers and trustees with open, contracted-out defined benefit pension schemes.

Pension scheme members are likely to have questions about what State Pension they may receive. Further information for individuals can be found on the new State Pension website. This website also includes an animation explaining contracting out.

WHAT THE GOVERNMENT IS DOING TO HELP SCHEMES/EMPLOYERS

The Government has legislated a statutory override for private sector employers so that they can recover the loss of the NI rebate by either increasing employee contributions or decreasing future benefit accrual. According to the legislation, employers will be unable to use the statutory override to recover any expenses incurred in making changes to benefits.

In March 2015 the Government published a response to its on the statutory override along with a final set of . We expect a further set of regulations to be published in Autumn 2015.

THE PENSIONS AND LIFETIME SAVINGS ASSOCIATION'S POSITION

We welcome the new flat rate State Pension, which complements the Government’s automatic enrolment reforms and gives people a solid base from which to build their private savings on for a good income in retirement.

We recognise that the transition from the current system to the new system is not easy. We are working closely with the Department of Work and Pensions to ensure that the regulations support employers and schemes.

The Pensions and Lifetime Savings Association is also looking at the Government’s work on Guaranteed Minimum Pensions (GMP) – particularly on GMP reconciliation, GMP conversion and GMP equalisation.

PLSA members interested in this work should contact joe.dabrowski@plsa.co.uk .

LINKS

new State Pension website

employer/trustee factsheets

  • Key facts

The 'Old Age Pension' was introduced in the UK in January 1909. A pension of 5 shillings per week, or 7 shillings and sixpence for a married couple, was payable to a person with an income below £21 a year.

The original state pension qualifying age was 70, and was subject to a means test..

In 1925 the Contributory Pensions Act set up a contributory State scheme for manual workers and others earning up to £250 a year. The pension was ten shillings a week from age 65.

In 1946 the National Insurance Act introduced contributory State pension for all.

The link between state pension increases and average earnings was broken by the 1980 Social Security Act.

2002 saw the switch from from Serps to the State Second Pension scheme. 

In 2010, the Government announced the 'triple lock', meaning that the basic state pension would be uprated by either wages, prices or 2.5per cent; whichever is higher.

The Government released its White Paper on State Pension Reform in January 2013. The paves the way for a simplified, singer-tier state pension.

The Pensions Act 2014 introduced in May 2013 legislates for the new flat rate State Pension.