State pension reform: Everything you need to know

The Government today published long-awaited proposals to introduce a flat-rate state pension worth £144 a week. Money Marketing’s Tom Selby analyses the implications of the plans.

What has the Government proposed?
The Government wants to introduce a single-tier, flat-rate state pension worth £144 a week, realising a long-held ambition of Liberal Democrat pensions minister Steve Webb (pictured).

Will everybody get this?

No, only future retirees will be eligible for the new flat-rate state pension. People will need to build up 35 qualifying years, either through National Insurance contributions or credits, to get the full payment. NI credits are given for things like caring for an elderly relative or taking time out of work to raise children.

People will not start to build up an entitlement towards the state pension until they have reached 10 qualifying years.

How will the Government treat people who have contracted-out of a defined-benefit scheme?

This is the difficult bit which Webb blames for several delays to the publication of the white paper.

Contracting-out will end when the single-tier state pension is introduced. As a result, these employees will need to start paying full NI contributions – an increase of 1.4 per cent of relevant earnings compared to what they paid previously.

The DWP plans to undertake a huge valuation exercise to determine how much state pension everyone is entitled to as at the implementation of the single-tier pension.

If someone has previously been contracted-out of the additional state pension, a deduction will be applied to reflect the fact they have paid lower NI contributions whilst they were contracted-out.

The Government will then check to see if the rules of the current system would give the individual a better outcome, with the higher valuation becoming the person’s “foundation amount”.

Anyone who has a foundation amount worth less than £144 a week will be able to continue to build up extra state pension entitlements until they reach this level.

Anyone whose foundation amount is worth more than £144 will still get the higher amount under the Government’s proposals.

How will employers with DB schemes react?

Well, that depends entirely on whether you are a public or private sector worker.

All employers with DB schemes who have contracted-out will see their NI payments increase by 3.4 per cent as a result of losing the NI rebate when contracting-out is abolished.

In the private sector, the Government wants to allow companies to adjust accrual rates to reflect this without having to get permission from the scheme’s trustees. This measure is designed to prevent firms closing their DB scheme altogether.

However, ministers have committed not to change public sector schemes for 25 years. As a result, public sector employers will not be able to reduce accrual rates to reflect the increase in scheme costs.

When will the new state pension be introduced?

The Government says it wants to introduce the new system in April 2017 “at the earliest”. However, during a briefing this morning Webb admitted this date is not set in stone and could be changed

How old will you need to be before you receive the state pension?

The state pension age will become a moving target, with the Government proposing to introduce a link with life expectancy.

This will be based on statistical analysis by the Government Actuaries Department. In addition, the DWP will set up an independent committee which will review other factors which impact on longevity, such as where someone lives.

The state pension age will be reviewed every five years and the Government will give people 10 years’ notice of any future changes.

State pension reform – the key changes:
a new, flat-rate state pension worth £144 a week in today’s prices will be introduced in April 2017 at the earliest;
the number of qualifying years an individual will need to build up to get the payment will increase from 30 to 35;
a person will need to have at least 10 years of National Insurance contributions or NI credits in order to qualify for the new state pension;
the payment will be based on individual qualification, without the facility to inherit or derive rights to the state pension from a spouse or civil partner;
contracting-out will be abolished;
future rises in the state pension age will be linked to longevity.
Source: Tom Selby 15 January 2013

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