Queen's Speech – what to watch out for on pensions – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    Queen's Speech – what to watch out for on pensions

    Queen's Speech – what to watch out for on pensions

    Queen’s Speech – what to watch out for on state pension reforms

    by Dr. Ros Altmann

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    Main points

    • No more earnings related state pension, giving clear base on which to build private pension savings
    • Many women and self employed can get better pensions but many others will lose
    • Government needs to find ways to ensure workers earning below NI minimum are credited for pensions just as non-workers are
    • Government must protect UK women who relied on husband’s pension and paid married women’s National Insurance
    • Ending mass means-testing is vital for auto-enrolment to work
    • National Insurance rules will change so full pension rights require 35 years in future (up from 30 now) and those with under 7-10 years get no pension
    • New flat rate pension rules disadvantage workers who relied on state pension or had no chance to contract out
    • Guaranteed Minimum Pension (GMP) rights are being cut – Government must be open about what it is doing

    The Queen’s Speech includes the Government’s plans for a new flat rate state pension of around £144 a week in today’s money to start from April 2016. This will ultimately deliver a more sensible system, but watch out for unfairness in the transition.

    The aims of this reform are

    • To give each person their own state pension rights without relying on others,
    • To end the mass means-testing of pensioners,
    • To make it safer to save without the state pension penalising people’s private saving
    • To simplify the system into one flat rate payment, rather than having so many different parts of the state pension, some flat rate and some paying more to people who earned more during their lifetime.

    Currently, there is a Basic State Pension and then various extra earnings-related state pensions (Graduated Pension, State Earnings Related Pension or SERPS, and State Second Pension, or S2P). All these parts will be joined together for future generations into one flat-rate state pension that will be paid to anyone with a 35 year National Insurance record. It is important to note that those who have more than £144 a week from their past rights will not be cut back to that level, they will keep their extra past rights.

    Designed to help women and self employed in particular: The new system is supposed to help women achieve better state pensions than before and will be particularly generous for the self-employed. Each person will be considered to have a right to a state pension based on their own work history and national insurance record, rather than potentially having to rely on a partner’s pension. This makes sense for the future, but it will be important to protect some older women during the transition phase. Steve Webb’s recent remarks about women living abroad have given rise to substantial concerns that British women living here may lose their past rights. That is not acceptable and the Government needs to urgently clarify its proposals for protecting those women who have paid national insurance in the UK (but on the married women’s basis).

    Married women and inherited rights need to be protected in transition: There has been much confusion in recent days about what is going to happen after 2016 to those women who have relied on a husband’s pension rights. Many older women were encouraged to pay married women’s National Insurance rates when they were young and thus lost their rights to a state pension. They did not realise this and just followed standard advice at the time, but the Government promised it would protect such women since they cannot do anything to change their position right now. It is important that the Pensions Bill includes protection for these women.

    New state pension needs to find a way to help women in jobs that pay below National Insurance minimum: The new state pension system still has not solved the problem that anyone working part time, perhaps in two or three jobs each of which pays below the minimum NI threshold, gets no state pension rights at all. So if a woman stays at home looking after her children, she pays no NI but gets credits for the state pension due to caring. If that same woman tries to go out to work, but can’t find jobs that pay more than the NI minimum, she will pay no NI but get no credit for the state pension at all. There are about 20,000 women in this situation but the DWP has so far said it is ‘too difficult’ to find a way to credit them for state pension. I believe the Government just has to find a way. If they can credit stay at home mums or dads who pay no NI, then they must be able to offer a special NI credit to those who are working but earning below the NI threshold.

    Pensioner means testing halved for new pensioners: The £144 a week level is set to be just above the current means-tested Pension Credit, so that in future pensioners will get enough from the state, if they have paid their full National Insurance, to lift them above the means-tested pension level. The result will be that, once introduced, the proportion of means-tested pensioners will be cut in half.

    Helps make auto enrolment safer: Ending the mass means testing of pensioners is essential now that the Government has started automatically enrolling all workers into an employer pension scheme. The policy is particularly aimed at lower paid workers who often get no chance to save for a private pension. However, this is the very group most likely to end up needing means testing in retirement. Because the state pension is earnings related at the moment, lower earners tend to have much lower state pensions than others. In addition, women who cared for others and had interrupted working careers were not credited properly into the state pension system in the past, so they also lose out on the earnings related state pension. Those who have just the basic state pension and little earnings-related entitlements will only receive around £110 a week with a full national insurance record, but after the new system starts, they will be pushed up to £144 a week.

    Means-testing retained for past pensioners and those without full state pension rights – 35 year record required and those with under 10 years contributions get no state pension: The new state pension will change the National Insurance pension qualification rules. After 2016, the full pension will only be paid to those with a 35 year National Insurance record (currently 30 years) while those who have only 7-10 years’ contributions will lose all their state pension rights and get no pension at all.

    Contracting out complexity will end in future, but remains for transition: Unfortunately, however, not everyone will actually receive the full £144 a week straight away, because many people in the past were in private pension schemes that replaced the earnings related part of the state pension. They paid lower National Insurance and in exchange gave up some state pension. This practice of ‘contracting out’ means many people will have their £144 reduced by the amount they will receive from the private scheme that they contracted out into. After April 2016, people will not be allowed to pay lower National Insurance to contract out of any of the state pension, they will all have to pay the same rate for the same flat rate state pension accrual. This complexity will ultimately be removed, but there will be special measures that actually prove very beneficial in transition to those who have some contracted out pension rights from the past.

    Those who relied totally on the state pension system lose out relative to those who contracted out: These special measures to accelerate the date when all state pensions will be at least £144 a week, mean that people who contracted out of the state pension system at some time in the past, but are still working, will have the chance to accrue better pensions than those workers who always relied solely on the state system. In a substantial change to the original reform proposals, the Government is now proposing that people who have a full National Insurance record can still go on to earn higher pensions by making up their contracted out deductions and adding extra state pension entitlements to bring them up to the full £144 a week. This will particularly benefit all public sector workers, and will relatively disadvantage lower paid private sector workers who never had a chance to join a private pension scheme. Many women will also be in this category.

    Guaranteed Minimum Pension uprating is being reduced: Buried away in the small print of the Pensions Bill seems to be a major change to the way that Guaranteed Minimum Pensions will be uprated in future. This is a very complex and technical change, but it means that the rights from contracted out state pensions earned in final salary-type schemes will be less generous over time as a result of changes in this Pensions Bill. This is likely to save the Government some money and will not be a large reduction for each person, but it is important that the Government is open and transparent about what it is proposing to do to the value of these so-called ‘Guaranteed Minimum Pensions – or GMPs’.


    Dr. Ros Altmann
    8 May 2013

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