State pension reform – the key changes

The government’s widely-trailed state pension reforms are set to be unveiled in Parliament at 3.30pm.

The reforms will see the basic state pension and state second pension replaced with a single flat-rate pension of £144 a week in today’s money from 2017.

Leaked details of the reforms point to the abolition of contracting out for DB schemes from 2017, an increase in the number of years qualification for full benefits from 30 to 35 and an end to the inheriting of spouse’s benefits by widows. State pension age is set to be linked to longevity, but 10 years notice will be given of any changes.

Tom McPhail, head of pensions research at Hargreaves Lansdown says: “This vital reform lays the foundation to rebuild the UK’s retirement savings. It will simplify the state pension for millions of today’s workers, allowing them to plan their retirement with more certainty.

“There will inevitably be winners and losers from this package of reforms. Anyone retiring before the reforms are implemented in 2017 may wonder why they are missing out on the £144 a week pension.

“Public sector workers will probably be angered by their increase in National Insurance rate; in fact they will do quite well from the reforms.

“We will almost certainly see another wave of private sector final salary scheme closures in response to the abolition of contracting out.

“Low earners and the self-employed will potentially be the big beneficiaries from the new more generous basic state pension.”

Otto Thoresen, director general, ABI, says: “A simple approach to state pension provision is a key element in ensuring the success of pension reform. With greater clarity about what the State will provide, and automatic enrolment to encourage people to make additional provision for their retirement through the workplace there is a real chance to create a savings culture in the UK. We welcome today’s proposals to take forward this legislation.”

State pension changes – The key changes

Replacement of the current basic and earnings related state pension systems a single tier state pension

The savings credit element of the pension credit will be abolished

There will no longer be an earnings related element to the state pension

Contracting out will be abolished

Single pension to be set at £144 a week in today’s money starting April 2017 based on 35 years’ service. This is likely to around £162 a week in 2017

The minimum will be 10/35ths or £41 per week

The triple lock guarantee (the higher of CPI, Earnings and 2.5%) will continue to apply to the state pension

One-off rebasing of everyone’s state pension entitlement

Those who contracted out of the second tier pension

Anyone who has been contracted out of S2P or SERPS will have a one-off adjustment made to their £144 per week entitlement.

The details are not yet available; however this deduction is unlikely to reduce the pension entitlement below the current basic state pension of £107.45 per week. This deduction reflects the benefits payable from their contracted out pension plan.

Anyone who is subsequently then below £144 per week will build further pension entitlement by continuing to pay National Insurance.

Those who are contracted in to the second tier pension

Anyone who retires after 2017 with a combined entitlement of state and second tier pension worth less than £144 per week (under today’s system) will receive £144 per week if they have paid 35 years’ NI contributions.

Anyone who is below state pension age in 2017 with a combined entitlement of state and second tier pension of more than £144 will keep that level of pension.

However they will then get split indexation, with the £144 element going up in line with the triple lock and the balance above that going up in line with CPI

Those who have had both contracted in and contracted out periods

Anyone who has been both contracted in and contracted out of S2P or SERPS between 1987 and 2017 will have a one-off deduction made to their entitlement based on the amount of time they were contracted out. An addition will then be made for the periods they were contracted in up to 2017

Change in the eligibility criteria

The minimum number of years to qualify for the full state pension will go up from 30 to 35 years

A minimum qualification period of 10 years will be reintroduced. Anyone with less than 10 years will not get a state pension

Increases to state pension age

Future increases to state pension will be longevity based

10 years notice will be required for a change in state pension age

This will be pushed back to the next parliament with a review of age 68

All contracting out will cease in 2017

Contracting out for private pensions and Defined Contribution schemes stopped in April 2012

Final salary scheme member schemes will cease contracting out from April 2017.

Members will therefore pay a higher rate of employee National Insurance Contributions from April 2017. Their employers will pay a higher rate of employer NI.

There will be no more inheritance of entitlement for widows, divorcees

Individuals have the ability to earn their own entitlement to the state pension and the Minimum Income Guarantee remains as a safety net, set slightly below the £144 per week in today’s terms (£142.70 for a single person 2012/13).