by Rachel Efetha
The much delayed White Paper on the future of state pensions has been published. While many of the finer points are yet to be settled, the framework for the new state pension regime is now clear.
- The current two-tier state pension system, comprising of the basic state pension (BSP) and earnings-related state second pension (S2P) will be replaced by a single-tier, flat-rate pension. The White Paper assumes ‘for illustrative purposes’ that this would be £144 a week in today’s earnings terms, against a current BSP of £107.45 a week.
- You will need National Insurance (NI) contributions or credits covering 35 years to obtain the full £144 a week – five more than are needed for the current BSP. If your NI record is less a minimum period (likely to be ten years), you will receive no state pension. At present you earn BSP for each year, regardless of how few.
- The single-tier pension will be earned on an individual basis, so you will not be able to rely on the NI record of your spouse or civil partner to boost your flat-rate state pension. However, transitional provisions will apply to soften the blow.
- The new pension will rise in line with earnings once in payment. The ‘triple lock’ guarantee which applies to the BSP (the greater of price inflation, earnings growth and 2.5%) is not guaranteed to continue beyond 2015.
- The state pension age (SPA) for men and women will rise to 67, with a two-year phase-in starting in April 2026. The Pensions Bill also imposes a requirement for five-yearly reviews of SPA, with the first due by May 2017. Any change decided at review will not take effect for at least ten years.
- You will not receive any savings credit if you reach SPA once the new flat rate pension is in place. Guarantee credit will still be available, but if you receive the full flat rate pension, you will not be eligible.
- At the point when the new regime is introduced, the existing state benefits you have accrued will be converted to a ‘foundation pension’. The calculation of this is designed to ensure that what you have earned to date is not lost, but how contracted out benefits are dealt with remains unclear. If your foundation pension exceeds the new flat rate pension, then the excess will be CPI-inflation proofed before and after retirement.
- The ending of S2P will mean that if you are currently contracted out through a final salary scheme, your (and your employer’s) NI contributions will increase. Ironically it will be the Government, as public sector employer, that will be most affected.
- The new regime will begin in April 2017, at the earliest.
All these changes will not mean the Government spends any more on pensions. The White Paper’s analysis shows that, in the long run, the Government will save money, even before taking account of the extra income from the ending of NI contracting out rebates. The corollary is that, just as the present state pension system will not provide a decent standard of living in retirement, neither will the single-tier system. But it will be simpler…
To ensure that you have the income in retirement to be able to fulfill your plans, you must make plans now whilst you are working. When was the last time you actually sat down and worked out how much income you will have to live on in retirement? You should review this once a year to check that you are on target (have you even set a target?). Contact your Independent Financial Adviser now to review your retirement plans.
Rachel Efetha is an Independent Financial Adviser at AWD Chase de Vere. She can be contacted on 07894 619793 or Rachel.firstname.lastname@example.org
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