The UK has had one of the most complex retirement income systems in the developed world. A lot of that complexity is the burden of history; much also relates to the UK’s tendency to include ‘saving’ provisions that protect accruals and entitlements under previous regimes. PensionReforms’ review of the 2012 ‘Green Paper’ is here. With about 45% of retirees qualifying for at least some income-tested ‘Pension Credit’, the system clearly wasn’t delivering ‘as of right’, needed support for pensioners. The Green Paper flagged the possibility of significantly simplifying the state pension. As this report acknowledges, despite pensioner poverty being at an “historic low” in 2010/11, it is still at an unacceptable high of 14% after housing costs.
This report sets out the changes the government aims to introduce with effect from 6 April 2016. The key reform will see the current three-section state pension (Basic State Pension, State Second Pension and Pension Credit) replaced by a new single-tier pension.
In the meantime:
“The number of people saving in an occupational pension scheme has fallen from a peak of just over 12 million active members in 1967 to 8.2 million in 2011, with a particularly significant decline in Defined Benefit schemes in the private sector. Government estimates that almost 11 million people in the current workforce face inadequate retirement incomes.”
The new Tier 3 scheme dubbed NEST started enrolling members from October 2012. Changes to both private and public provision would have seen a reduced reliance on the means-tested Pension Credit (from 45% to about 10% by 2050), but:
“Substantial complexity and uncertainty remain – meaning that many people do not have a clear starting point from which to plan and save for their retirement. In a Department for Work and Pensions (DWP) survey, 63 per cent of respondents identified with the statement that “sometimes pensions seem so complicated that I cannot really understand the best thing to do”.”
The report announces that the government has decided to proceed with the ‘single tier reform’.
“The single-tier reforms will restructure current expenditure on the state pension into a simple flat-rate amount, to provide clarity and confidence to better support saving for retirement.”
The pension will be set at just above the “Pension Credit Standard Minimum Guarantee, currently £142.70 per week for a single pensioner”. That will increase “at least with average growth in earnings” and replace “the State Second Pension, contracting out and outdated additions, such as the Category D pension and the Age Addition.”
Retirees must have at least 10 qualifying years’ of National Insurance contributions to receive any pension and have at least 35 years for the full amount. Those with 10-35 years will receive proportionally adjusted amounts. The current right to defer receipt in exchange for a higher annual amount will remain.
The report expects that by “…the mid-2030s, over 80 per cent of people will receive the full weekly amount of single-tier pension, narrowing the range of pension outcomes in comparison to the current system and improving certainty. The proportion of people reaching State Pension age after the implementation of single tier who qualify for Pension Credit will be halved compared to the current system, and remains under 10 per cent through to 2060. The single-tier pension will also help to address gender inequality in the system, bringing forward by over a decade the point at which men and women achieve equal state pension outcomes.”
The demise of the State Second Pension (S2P) means that ‘contracting-out’ by private schemes in exchange for a reduction in National Insurance contributions will also disappear. Both employees and employers will pay the full contribution rates but the record of past reduced contributions will be preserved with consequential reductions in the new pension.
The complexity of current arrangements mean a necessarily complex transition. However:
“Compared to proposals set out in the Green Paper, this approach speeds up the process of transition, significantly increasing the number of people who will receive the full single-tier pension. By the mid-2030s, over 80 per cent of people reaching their State Pension age will receive the full single-tier amount.”
The cost of the new arrangement is expected to reduce from, currently, 8.5% of GDP in 2060/61 to 8.1% in 2060.
The current State Pension Age will be 66 by October 2020. Because of continued expected improvements in mortality, the State Pension Age will continue to increase to 67 between 2026 and 2018 and will review that each five years “…based around the principle that people should maintain a specific proportion of adult life receiving the state pension.”
PensionReforms thinks the proposed ‘single tier pension’ is a step in the right direction but the UK’s overall arrangements will remain complex for decades as the old entitlements are gradually overtaken. Other reforms that we suggested here include:
- getting rid of the National Insurance contribution system;
- speeding up the transition;
- getting rid of the auto-enrolment requirement in Tier 3’s NEST;
- abolishing tax reliefs for retirement saving;
- moving civil servants on to ‘total remuneration’ rather than ‘pay + pensions’;
- reforming the treatment of state pensions payable to overseas’ residents.
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