The proposed changes to state pensions aim to address the problems of funding pensions for a growing population of retirees, deal with the anomalies that arise from contracting out and simplify the system.
These changes look likely to effectively freeze pension entitlements accrued at the date when the single tier pensions are introduced. 2017 is given as the earliest year in which the changes may be implemented.
Under single tier pensions, individuals will need 35 years’ credits to obtain full entitlement, instead of the present 30 but one of the “selling points” of the new system is that it should remove gender differences by removing married women’s and civil partners’ entitlement to inherited credits from their spouses and replacing it with separate, independent credits.
There will be some protection for people who will have accumulated 35 years’ credits when the new system comes into force and those already entitled to a pension greater than the single tier pension (currently proposed to be £144 p.w.) will only receive limited protection as the difference will be preserved as a frozen addition to the weekly pension, i.e. the amount appears likely to be fixed and not uprated with the single tier amount.
People who have been contracted out will have their credits discounted to represent their historic lower levels of contribution and so may need to consider buying additional credits. Weekly pension entitlements under the existing rules are to be compared with entitlement under the single tier rules and the higher of the two weekly amounts will for the “foundation amount”, i.e. the weekly pension entitlement accrued at the start date. If the foundation amount is greater than the single tier pension that will fix the contributor’s entitlement but if the foundation amount is less, the contributor will be able to accrue further credits before reaching retirement age or purchase credits for additional years.
Key points of the new proposals
- Single tier pension rate proposed: £144 per week
- 35 years’ credits will be needed for full entitlement (currently 30)
- Credits for accrued pension years will be preserved
- Full credit will not be given for contracted out years
- As now, people who do not have full credits should be allowed to buy additional years
What should contributors be doing?
The proposals are clearly at an advanced stage of development but the final details have not yet been worked out and the date for introduction is not firmly fixed. Therefore it is too early to commit to action yet but it is quite possible that taking action under the existing rules to anticipate the change may prove beneficial.
Current year-purchase rules are very advantageous
At present a person who has not been paying NICs or receiving credits may, in certain circumstances, purchase additional years’ credits on highly advantageous terms. Purchases of additional credits are normally restricted to six years after the year for which the shortfall is to be made up but there is an additional window of opportunity to make up NIC credits that runs until 2015. Therefore it is likely to be worthwhile checking one’s entitlement to pension and finding out what scope there is for adding additional years. The White Paper indicates that protection will be given for all credits accrued before single tier pensions are introduced.