New State Pension A Unite Briefing Describing The New State Pension
A Unite briefing describing the new State Pension
New State Pension
The State Pension is changing for all those members reaching their State Pension Age after 6 April 2016. This will impact men born after 6 April 1951 and women born after 6 April 1953, reflecting the respective state pension ages of men (65) and women (63) at that date.
Those who will reach, or have reached, their State Pension age before that date are not affected.
The new State Pension is a single-tier benefit which will replace both the Basic State Pension and the State Second Pension, and its predecessor schemes. However, transitional provisions mean that the entitlements to these benefits of the current workforce are still taken into account.
Although a single figure for the amount of the new pension is regularly quoted some people will get more and some less than that figure.
The standard level of the new State Pension will be £155.65. To gain entitlement to the full amount a person entering the workforce will require 35 years of NI contributions or credits. Each year of contributions qualifies for £4.45 a week, subject to a minimum of ten years to qualify for any benefit.
Transitional provisions apply to the current workforce. As at April 2016 everyone will be assessed for their starting amount under the new system. This will be calculated as the better of :-
- The entitlement earned under the pre-2016 rules for Basic State Pension and State Second Pension (etc.)
- The entitlement they would qualify for in the new State Pension if they had always been in it
But, for employees who in their working lives have had periods when they were contracted-out of State Second Pension (or SERPS), in both cases, the starting amounts will be reduced to reflect that. This is because during periods of being contracted-out lower NI contributions have been paid and it is assumed you have earned replacement pension benefits in an employer scheme or a personal pension.
Where a person has a starting amount of less than £155.65 then for each year of paid or credited NI contributions from April 2016 onwards they will add £4.45 to their entitlement until they reach £155.65.
Where a person has a starting amount greater than £155.65 then the excess amount over that figure will be designated as being their protected amount and entitlement to it will be retained. They will not be able to add to their state pension despite being required to continue paying full NI contributions.
The new State Pension will be increased on the same basis as the current State Pension – i.e. in line with the higher of average earnings increases , CPI inflation or £2.50 each year . However, protected amounts in excess of the standard level will only be increased in line with CPI inflation.
Like the current State Pension, the new State Pension will only be payable from State Pension Age.
The changeover to the new State Pension will mean the end of contracting-out. This applies now to most employees in employer defined benefits schemes. After April 2016 contracting-in will result in higher NI contributions both for employees (an extra 1.4%) and employers (an extra 3.4%).
There is information on the Government website. The publication ‘Your State Pension explained’ can be accessed via https://www.gov.uk/government/publications/your-new-state-pension-explained
Members can apply for a state pension statement via https://www.gov.uk/state-pension-statement
For those aged over 55 only this provides a statement based on the new State Pension if their State Pension Age is on or after 6 April 2016. For others the statement will only calculate on the basis of the pre-2016 State Pension.
If you are unsure about your State Pension Age and when you will reach it, the pension statement link above includes a calculation of this.
The change does not increase the total pay-out of state pensions and so there are as many losers from the changes as there are gainers amongst the non-retired workforce who are affected. It does nothing to alter or to improve things for pre-2016 pensioners.
The biggest losers are those people who have full NI contribution records and who have been contracted-in for long periods. They would, in many cases, have got a much higher benefit than the new State Pension will deliver.
State Pensions are a defined benefit and the maximum scope of that benefit is being substantially reduced by this change, making employees ever more dependent on uncertain defined contribution pension schemes.
The largest gainers will tend to be those groups who would not have acquired any or much State Second Pension. These would include the self-employed and those with low earnings/broken careers (many of whom are women now approaching retirement).
Employees who have been contracted-out will after becoming contracted-in next April start to earn higher state benefits than they would have under the current system. However, some of this advantage, for those in the private sector, may be clawed back if employers make changes in their schemes to offset higher employer NI costs. The Government is encouraging them to make such changes.
Employees in public service schemes will not face any clawback but could suffer other consequences as the Government is not showing any sign that it will compensate employing departments for their higher NI costs, which may have a knock-on on pay and job security.
Unite would have preferred to see an increase in the Basic State Pension and the continuation of an earnings-related state pension to allow people to build up extra state pension on top of that. The negative impacts of the new State Pension could only be mitigated if it is set at a much higher level than the Government is planning for.