The Pensions Bill effective from April 2016 has now received Royal Assent and will become the Pensions Act 2014.
Amongst other things, the new Act will change the State Pension system for people who reach the State Pension age on or after 6 April 2016. The change will apply to men who were born on or after 6 April 1951 and women who were born on or after 6 April 1953.
see also: Pension and Tax Relief Guide (January 2015)
Overview
From 6 April 2016, there will be a new, single-tier State Pension which will replace the current system of a basic and an additional State Pension.
The full level of the new State Pension will be set above the basic level of any means- tested support.How much people will get
will depend on the record of their individual National Insurance contributions. People will need to have a minimum of 10 National Insurance qualifying years to receive any State Pension.
The reforms are designed to significantly simplify the State Pension system so it is easier for people to understand how much
State Pension they will get when they retire and to be more certain of the value of planning and saving for their retirement.
Further Information from AgeUK
A new single-tier, flat-rate State Pension is being introduced which will affect people reaching State Pension age from 6 April 2016 onwards. Find out what the changes mean for you.
In May 2014 Parliament agreed the Pensions Act 2014. The act:
- introduces a single-tier, flat-rate State Pension, which will replace the basic and additional pensions for people reaching State Pension age from 6 April 2016 onwards
- increases the State Pension age from 66 to 67 between April 2026 and April 2028
- makes provision for 5-yearly reviews of the State Pension age.
The information here provides an overview of the new system. You can also find more information on GOV.UK.
Why the new flat-rate pension is being introduced
The existing system is complex, has high levels of means-testing and produces inequality – for example, women tend to have lower State Pensions than men.
The Government wants to address these issues and the aim is to introduce a simpler, fairer system where people have a clearer idea about what the state will provide, making it easier to plan their retirement savings.
The new single-tier pension will only affect people reaching State Pension age from 6 April 2016 onwards. That is women born on or after 6 April 1953 and men born on or after 6 April 1951.
How the changes affect current pensioners
The current State Pension and benefit systems will continue for those who are already pensioners or who reach State Pension age before 6 April 2016. It’s the date that you reach State Pension age that’s important – not when you start to claim your pension.
State Pension top up
For people who are already receiving their pension or who will reach State Pension age before 6 April 2016, a new scheme starting in October 2015 will allow people to pay a new class of voluntary National Insurance (NI) contributions (called Class 3A).
This is intended to help people boost their additional State Pension by a maximum of £25 per week. The scheme will be open for a period of 18 months from October 2015.
Anyone considering this will need to weigh up the costs of contributions with the likely increase to their pension income.
Key features of the new single-tier pension
When the single-tier pension is fully introduced it will have the following features:
- Current basic and additional pensions will be replaced by a single pension.
- The level will be set in autumn 2015 and will be worth more than the standard amount of Pension Credit guarantee, so the new pension will be worth at least £148.40 week.
- The full single-tier State Pension will be given to people with at least 35 years National Insurance (NI) contributions or credits.
- To qualify for any new State Pension, people will need at least 10 years of contributions. Those with between 10 and 34 years of contributions will receive a proportion of the pension.
- ‘Contracting out’ will end. This will only affect people in defined benefit occupational schemes as it has already ended for people in defined contribution schemes.
- It will be an individual entitlement, so in general there will be no special rules for people who are married, bereaved or divorced.
- Pension Credit and other means-tested benefits will continue to provide a safety net, but the savings credit element of Pension Credit will be abolished.
- The proposals are intended to be cost neutral every year – meaning that overall spending on State Pensions will not increase – so there will be winners and losers as compared to the current system.
Contribution and credits before 6 April 2016
Although the new system is based on a single amount for everyone with at least 35 years of contributions, you may get more or less than the £148.40 if you have contributions or credits from before April 2016.
When the single-tier pension is introduced in 2016, anyone who has already built up a NI record will have a ‘starting amount’. This will be the higher of:
- the amount you would have received under the current system including basic and additional pension
- the amount you would get if the new State Pension had been in place at the start of your working life.
A deduction will be made from the starting amount if you have been in a ‘contracted out’ personal or workplace pension scheme – for example if you have been a member of a public sector pension. In this case normally you will have paid lower NI contributions because you were paying into a contracted out pension instead
If your ‘starting amount’ is more than the level of the new State Pension, due to the basic and additional pension you have already built up, any amount over £148.40 will be protected and paid in addition to the single-tier pension when you reach State Pension age.
If your starting amount is less than £148.40 you may be able to build up more pension for any years of contributions or credits between 6 April 2016 and when you reach State Pension age.
Means-tested support
Pension Credit guarantee will continue to be available under the new system, but those who reach State Pension age on or after 6 April 2016 will not be able to claim savings credit. Housing Benefit will continue (but will be incorporated into Pension Credit in the future) and the system of Council Tax support will also remain.
An individual entitlement
The State Pension is based on your own contributions and in general you will not be able to claim on your spouse or civil partner’s contributions at retirement or if you are widowed or divorced. However if you are widowed you may be able to inherit part of your partner’s additional State Pension already built up. There is also provision under the new system for women who paid the reduced rate ‘married woman’s contributions’ to use these contributions towards the new State Pension.
If you are not on course to receive a full State Pension on your own contributions you may be able to increase your entitlement – for example by paying voluntary NI contributions or if you are eligible for credits. Contact the Pension Service for more information.