How will the single tier state pension affect you?
THE launch of the single-tier state pension is less than two years away. According to a survey carried out by the Sunday Times nearly a quarter of the 2,038 adults questioned were unaware that any reforms were taking place at all! Eight out of ten 55 to 64-year-olds say they don’t know how much they’ll receive! A quarter, though, are convinced, potentially wrongly, that they’ll be better off. How will you be affected?
From April 2016, the government is promising to replace the current two-tier system of basic pension plus earnings-linked top-up with a single-tier pension of £155 a week
In theory, anyone with a full National Insurance Contribution (Nics) record for 35 years, either via in-work deductions or out-of-work or caring credits, will qualify for the new payment. However, those with fewer than 10 years of contributions will get nothing
How much will I get?
Worryingly, that’s very hard to say as the Department for Work and Pensions (DWP) are still refining the calculations that will determine payments and deductions!
For those retiring in 2016, or shortly afterwards, 35 years of Nics will make you eligibile for the full £155. If, because of high levels of state earnings-linked top-ups (Serps or S2P), your state pension is already higher than £155, the DWP will deduct £155 from your combined two-tier accrual. You’ll be paid £155 plus a top-up. This is good news, because the £155 will be inflation-proofed by the triple lock, initially at least, whereas the top-up rises in line only with CPI. Over time, this will have a dramatic impact on how much you get
If you’ve paid reduced Nics, perhaps because you were one of the 7m in contracted-out employer schemes, you’ll receive only a fraction of a credit for each year, with the intention of lowering your state entitlement back to the level of the existing basic pension. This will be triple-locked. Your remaining state pension will be paid by your employer, and will rise in line with the scheme rules
Those who’ve been contracted out for 30 years, but who are now contracted in and are continuing in work, will be able to accrue more credits and can achieve the full 35-year record within nine years. This will be of benefit only to lower earners
Who’ll be better off?
According to the Institute for Fiscal Studies (IFS), the gains will be largest among those who have spent periods out of the labour market caring for children or who have had long periods of self-employment. The IFS says women will typically gain £5.23 a week, and anyone who has been more than 10 years self-employed will be better off on average by £7.51 per week. Additionally the Pensions Policy Institute think tank has concluded that anyone aged 59 or over today, retiring after 2016 with a good national insurance contributions (Nics) record, will be better off
Self-employed people look set to definitely benefit with the new plan, since many dn’t currently have anything set aside for a state second pension. The new single-tier plan will enable them to be part of the state pension system for the first time
Mothers and/or caregivers who haven’t spent much time in the workforce will also benefit under the new system as they’ll now be included. This is expected to help over 750,000 women in the UK, especially those who earn low wages, as they’ll now be covered. However women who have less than the necessary 10 years of NI contributions won’t receive anything, and need to plan now for their retirement, or consider other options that may be available to them
The government has assured the public that those who have accrued pension rights under the old system will not lose out on any earned pension that is already in the system
Who’ll be worse off?
The abolition of the earnings-linked pension will leave many workers significantly worse off, with younger employees hit hard. Those whose total two-tier state pension has already exceeded £155 will have to continue paying Nics for years, for which they’ll receive no benefit. The government is also scrapping the married spouse’s pension, which has allowed partners with little or no record to claim a pension using their husbands’ record.
Additionally, those who retire on a state pension of less than £155 a week before 2016 can’t join the scheme.
Perhaps the only upside for those worse off, especially younger workers, is they will increasingly know exactly what they’ll receive upon retirement. Although they’ll receive less than under the current system, they’ll have the advantage of using the years ahead of them to plan for the small reduction in funding
You can find out more about the new pension at www.gov.uk
The DWP has promised that those retiring in 2016 and the following five years will get a pensions forecast later this year. Should be interesting!