State pension reform – the winners and losers

31st January 2013

In mid-January, the Department for Work and Pensions (DWP) published its long-awaited White Paper on reform of the state pension system. The paper sets out how the government aims to move from the current two tier system of state pension (basic state pension and a state second pension (S2P) for employees only) to a single tier pension for the employed and the self-employed.

State pension reform winners and losers

The main points to note are:

  • The flat rate pension will be £144 a week (in today’s terms) for a single person, against a current basic state pension of £107.45 a week and a maximum possible additional benefit (SERPS and S2P) of £161.94 a week. The pension will be on an individual basis, with no facility to inherit or derive rights from a spouse/civil partner.
  • The ‘qualifying period’ of National Insurance contributions or credits to obtain the full flat rate pension will be 35 years. You will receive no benefit if contributions do not cover a minimum period – likely to be 10 years. At present 30 years is sufficient to obtain a full basic state  pension and the minimum contribution period  for any benefit is just one year.
  • As S2P will disappear, contracting out (via final salary pension schemes) will also disappear. Active members in such schemes – about 75% of whom are in the public sector – and their employers will see their National Insurance contributions increase because the contracting out rebates will be withdrawn.
  • The planned changeover date is 6 April 2017, “at the earliest”. If you reach state pension age before the changeover, the reforms will not affect you.
  • Broadly speaking, all state pension benefits accrued up to the changeover date will be preserved. However, there are complex, yet to be detailed, rules that will take account of contracted out benefits.

The reforms have a long-term cost which is below that of the current state pension regime. As a result the winners (the low paid, those with a limited working life and the self-employed) will be outnumbered by the losers (the higher paid, the young and members of final salary schemes).

Make no mistake: at best this reform does no more than establish a very modest foundation on which to build your retirement plans. It is not a substitute for private provision and, if you choose to depend solely on the state, the reforms could leave you worse off than under the current rules.

If you would like to learn more about the White Paper and how it affects your retirement planning, please talk to a member of the Fortitude Financial Planning team.

The Small Print
This blog post is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at January 2013 and the contents of the 2012 Autumn Statement and draft Finance Bill 2013 draft clauses.  No action must be taken or refrained from based on its contents alone.