The Government’s new pension scheme will probably be the most significant change that it will introduce during its five years in power. The Single Tier Pension will affect some 40 million people when it is introduced in 2016. Yet, despite its importance and the Chancellor’s decision to bring forward the implementation date, as announced in this year’s budget, there remain a number of unanswered questions that are causing groups as disparate as the TUC and the Institute of Directors to express concern. These groups have now been joined by an influential House Comes Committee who were asked by the Government to undertake the pre-legislative scrutiny of this important reform.
The key components of the new pension scheme are: –
It will replace both the Basic State Pension and the State Second Pension, so that the process known as contracting out will end
The level of the new pension will be set above the basic level of the Pension Credit Standard Minimum Guarantee which is currently £142.70 per week for a single person
In order to qualify for the full amount of the new pension an individual will need to have 35 qualifying years of National Insurance contributions or credits and qualification will be completely individual. There will be no facility to build a pension entitlement based on a spouse or civil partner’s National Insurance contributions or to inherit that right.
They will be a minimum qualifying period, though the exact extent of this is unclear. The Government have indicated that it will be between 7 and 10 years.
While it will still be possible to defer claiming State Pension and receive a higher weekly amount in return, it will no longer be possible to receive a deferred State Pension as a lump sum payment.
Planning, the key to a comfortable retirement
The new pension arrangements will only apply to those reaching State Pension Page after the implementation date for the new pension arrangements and the Savings Credit element of Pension Credit will be abolished for those who qualify.
There has been broad approval of the idea that the pension scheme in the United Kingdom should be simplified. Once transitional complexities are worked out it should be considerably easier for individuals to understand the amount of the pension provision that they will receive from the State. The Government have suggested that this certainty should encourage us all to make proper provision for our own retirement. However, as the Institute of Fiscal Studies has pointed out previous Governments have announced “final” radical reform of state pensions in 1998, 2002 and 2006. The frequency of such reform hardly makes it easier for individuals to appropriately plan for retirement.
There will undoubtedly be those who benefit under the new pension arrangements. They will be of most benefit to individuals who would not have been able to build up much entitlement to the State Second Pension under the current system. This group includes: –
Self-employed people who will be brought fully into the States Pension under the new system and are therefore more likely to receive a higher pension
Individuals who have already had significant periods of low earnings or employment gaps, particularly women and carers
People who were previously contracted out of the Second State Pension, particularly if they have time to build up more pension after the new pension arrangements come into force.
There will however also be some significant losers under the new scheme. These are mainly: –
Employees with significant periods of employment when they were contracted into the Second State Pension, but who will not be able to accrue any further Additional State Pension under the new system.
Anyone entering the labour market after 2002, because under the new arrangements each year of contribution will only be worth £4.11 in pension compared to £5.05 p for low earners and £5.81 for higher earners under the present system.
Overall it would seem that there will be more winners in the short term but in the long term the pension of the vast majority of people will be reduced. This seems to be confirmed by the Government’s own figures. The Pensions Minister has acknowledged that there will be “no new money” for pensions and in fact by 2060 the Government predicts that spending on State Pensions will fall from an estimated 8.5% of Gross Domestic Product under the current system to 8.1% under the new pension arrangements. Bearing in mind the rapidly ageing population it would not have been unreasonable to have expected the proportion of GDP used to fund the State Pension system to increase over this period.
There are also concerns about particular groups and the complications of moving from the old system to the new.
The removal of Savings Credit will result in some of the lower earners being worse off under the new pension scheme. Age UK has suggested that some people reaching pension age just after the implementation of the reforms will lose £18 a week in Savings Credit. There is also some confusion as to how the new pension arrangements will link with other benefits such as Housing Benefit and Council Tax Support in the future. The Pensions Minister has acknowledged that more consideration needs to be given to how “pensioner passported benefits”, including those administered by other Government Departments, would be dealt with under the new pension scheme.
Those lucky enough to still be in Defined Benefits schemes through their Employers may also find that their contributions need to be increased. The removal of contracting out arrangements means that the “contribution” currently being made to such schemes by Government will no longer be available. The Government has indicated that the additional funds available to the Treasury will not be injected into the pension system, but instead used to fund the projects intended to generate general economic growth.
As the House of Commons Committee has pointed out there are already a number of myths growing up around the new pension arrangements. In particular, many people appear to mistakenly believe that they will receive the full amount of the new pension regardless of contribution.
While Pension Credit will remain available under the new pension arrangements, albeit in a rather simpler form, we know that about a third of those currently eligible do not claim, meaning that some of the poorest pensioners in the country lose out on an average of £34 a week. The Government’s most recent estimate of unclaimed Pension Credit suggested that the Treasury may be left with a whopping £2.8 billion a year that ought to be paid to these pensioners.
The House of Commons Committee expressed some considerable surprise at the budget announcement of the intention to bring forward the implementation date of the new pension scheme. Only a week before the budget the Pensions Minister told the Committee that the original 2017 date was the Government’s preferred one. The Committee has expressed alarm that it was unable to properly investigate the impact of the earlier date during its deliberations upon the proposal.
Reading the report of the Committee and the evidence that it took there is a clear consensus that proper information is essential to ensuring that the new pension arrangements are properly implemented. Indeed the Committee commented “Earlier education about planning one’s retirement income is also needed and should start in schools, as part of a financial education curriculum.” These comments very much echo those of the House of Lord’s Committee that reported recently on the funding of Social Care costs. Whether these calls for greater information and education will be acted upon remains to be seen. Certainly, for anyone facing the prospect of impoverished retirement, ignorance is not bliss.