State Pension reform

Late last year in December 2012 saw the 70th anniversary of the publication of the Beveridge report. This document which ran to 300 pages became the model for the welfare state. Indeed, the anticipation concerning its publication led to a reportedly mile long queue outside the Government Stationery Office on 1 December 1942 to get hold of a copy. Entitlement to a basic non means-tested contributory retirement pension was central to Beveridge’s vision of a universal social insurance scheme.

Seventy years on, much has changed:

• the Office for National Statistics projects that 36% of people born in 2013 will live to become centenarians – in the 1940s only a minority of men survived to 65
• the number of women in work has seen a 50% increase – in 1948 only around four out of ten women were in paid employment
• the number of divorces that took place has risen from 11% of the number of marriages in 1948 to about 50% in 2012
• the labour market has become a lot more diverse – over a third of those working today are either self-employed or in part-time work.

Over the last 70 years since then, successive governments have attempted to keep pace with this social and economic change building on top of the Beveridge model. However many people do not have any idea as to what they will receive when they retire due to the complexities of the system as a result of these continual changes. Furthermore increasing dependence on means-tested benefits etc, which in effect compensate for the long-term decline in the relative value of the basic State Pension has compounded this complexity.

The Government had previously announced in the 2011 Budget that it intended to simplify the State Pension scheme so that it would provide a simple, contributory, flat rate support above the level of the means-tested Guarantee Credit. In the 2012 Budget it was confirmed that a single tier pension would be introduced early in the next Parliament. In addition, because of the increases in longevity the State Pension age will be increased in the future.

The devil is in the detail…

The single tier reforms will restructure the State Pension into a simple flat rate amount from 2016 at the earliest. Those over State Pension age when the reforms are implemented will continue to receive it in line with existing rules. The single tier pension will:

• be set above the basic level of means-tested support. The amount in current terms is around £144 weekly but may well alter nearer implementation
• replace the State Second Pension, contracting out and out-dated additions, such as the Category D pension and the Age Addition. The Savings Credit element of Pension Credit will also close to pensioners reaching State Pension age after the implementation of the single tier pension
• require 35 qualifying years of NIC or credits for the full amount, with pro-rating where 35 years is not achieved. A minimum qualifying period of between seven and ten qualifying years is also being considered
• be based on individual qualification, without the facility to inherit or derive rights to the state pension from a spouse or civil partner and
• continue to allow people to defer claiming their state pension and receive a higher weekly state pension in return. The deferral rate will be finalised closer to the planned implementation date. It will no longer be possible to receive deferred state pension as a lump sum payment.

Transition to the new regime

The transitional regime will:

• translate an individual’s existing NIC records into a simple single tier starting amount to be known as the ‘foundation amount’
• value an individual’s NIC record using single tier rules. Where an individual has previously been contracted out of the additional State Pension, a deduction will be applied and
• as a safeguard, the Government will check to see if the rules of the current system would give a better outcome. The higher valuation will then become that individual’s foundation amount.

For those with a foundation amount which is more than the full level of the single tier pension, likely to be older people with many qualifying years and who have not spent significant periods contracted out of the additional State Pension, these people will receive the difference between their foundation amount and the full single tier amount as an extra payment on top of the full single tier weekly amount.

We will keep you posted of any further developments.