Pensions Update Programme Learning Outcome 6 By the end of this learning outcome you will be able to explain the following:. The changes to the state pension in 2016 How these changes will affect different client groups Abolition of defined benefits contracting out Changes to state benefits associated with the changes in the state pension. Aviva - 1 - v 2016
Summary of changes The most fundamental change is that every individual will have their own entitlement under the single-tier State pension. There will not be an equivalent of the existing Category B pension in respect of rights built up under the new system, though there is a transitional arrangement to protect those who have built up an entitlement to a Category B pension under the pre-2016 system. The other fundamental change is that everyone will build up entitlement to state pension at the same rate. There will be a minimum qualifying period of 10 years, and the full singletier State pension will only become payable after 35 years of qualifying contributions. Thus, there will be no additional state pension, and therefore nothing from which to contract out. Thus, contracting out within a defined benefit pension scheme will end. As a result, Class 1 National Insurance Contributions will increase for both employers and employees. How much will people receive? This depends on two factors their record of contributions and the system under which they were built up. Anyone who starts paying NICs after 5 April 2016 will build up entitlement under the single tier pension only. Individuals will need at least 10 years satisfactory NI contributions in order to receive any state pension under the single-tier State pension regime. They will accumulate pension at a rate of 1/35 of the full rate for each year of satisfactory contributions, and therefore need to contribute for 35 years in order to receive the full single-tier State pension, as calculated solely on the new basis. Anyone who had already accumulated entitlement to state pension under the pre-april 2016 system started the new regime with a foundation amount. This was the higher of their entitlement at 6 April 2016 under the old and new regimes in the first case, including entitlement under the Additional State Pension. If that is less than the full single-tier State pension, then they are able to accrue further entitlement under the new system. If it is more than the single-tier State pension, the premium will be preserved and revalued, and added to the single-tier State pension when the entitlement age is reached, but NICs paid under the new regime will not actually increase pension entitlement. Anyone who had been contracted out of a component of the additional state pension (e.g. building up GMP, Section 9(2b) rights or former Protected Rights) will find that their entitlement is reduced to reflect that contracting out. This reflects the fact that they have chosen for the pension to be provided by another scheme. Once the foundation amount has been calculated, this can be increased up to the full singletier State pension amount (assuming that it is lower) by National Insurance contributions paid under the new regime. This is possible even if the individual has already paid 35 years worth of contributions individuals in this category are likely to be those who had previously contracted out of the additional state pension for most of their working life. Aviva - 2 - v 2016
Working out the foundation amount The foundation amount was the higher of two figures: a. the amount payable under the previous State Pension rules b. the amount payable if the single-tier State pension had been in place at the start of working life The calculations worked like this (figures based on 2015/16 amounts of basic State pension and the single-tier State pension in 2015/16 terms): Maximum pension current rules Calculate how much the Basic State Pension is under the current rules. The maximum is 115.95 per week for those with 30 years worth of credits. For those with less than 30 years of credits, the maximum is reduced by 3.86 and ½ pence for every year less than 30 years. For example, if you have 25 years worth of credits the amount due would be 96.62 Maximum pension new rules Calculate the number of years up to a maximum of 35 - of National Insurance credits gained from working or receiving Child Benefit, Jobseekers Allowance, Employment and Support Allowance or Carer s Allowance. Add on any Additional State Pension entitlement under the current rules. Whilst not impossible, this part is hard to calculate as you would need an individual s complete earnings history on which NI Contributions have been paid from 1978 or when they started working, if later. The Department for Work and Pensions should calculate this when working out the starting amount for the new single-tier State pension. Remember that an individual will get no Additional State Pension for any years they were contracted-out via an employer s pension scheme or using their own personal pension. Multiply by 4.32 for each year. For example, if an individual has 25 years of NI Credits this would give them 108.00 per week i.e. 25 x 4.32 Add on any Additional State Pension entitlement under the current rules. Aviva - 3 - v 2016
Deduct an amount broadly equivalent to Additional State Pension for each year of contracting-out. Under both systems, this is virtually impossible to calculate without knowing an earnings history and the complex rules for Additional State Pension. A Entitlement under current rules and the minimum an individual will get when the singletier State pension starts B Amount of single-tier State pension had the new system been in place when you started work Higher of A & B = Foundation amount of single-tier State pension It is possible that the foundation amount was higher than the new single-tier State pension of 151.25 a week (35 times 4.32). This would be the case if someone has spent a large part of their working life contracted-in and building up Additional State Pension. It is also possible that the foundation amount was less than the new single-tier State pension of 151.25 a week. This would be the case if someone has less than 35 years worth of NI credits or they have spent a large proportion of their working life contracted-out via an employer s pension scheme or personal pension. Aviva - 4 - v 2016
If the foundation amount is higher than the single-tier State pension, then this will create a protected amount. This will be increased in line with CPI, and added to the full single-tier State pension when the earner retires. State Pension Age The state pension age is also in the process of changing: it will reach age 65 for women on 6 November 2018 and is currently between 62 and 63. It will increase to 66 for both sexes between December 2018 and 6 October 2020. This affects those born between 6 December 1953 and 5 April 1960: Date of birth Date State Pension age reached 6 December 1953 5 January 1954 6 March 2019 6 January 1954 5 February 1954 6 May 2019 6 February 1954 5 March 1954 6 July 2019 6 March 1954 5 April 1954 6 September 2019 6 April 1954 5 May 1954 6 November 2019 6 May 1954 5 June 1954 6 January 2020 6 June 1954 5 July 1954 6 March 2020 6 July 1954 5 August 1954 6 May 2020 6 August 1954 5 September 1954 6 July 2020 6 September 1954 5 October 1954 6 September 2020 6 October 1954 5 April 1960 66th birthday The state pension age will rise again to 67, between April 2026 and March 2028, for those born between 6 April 1960 and 5 April 1977, as set out in the following table: Date of birth Age State Pension age reached 6 April 1960 5 May 1960 66 years and 1 month 6 May 1960 5 June 1960 66 years and 2 months 6 June 1960 5 July 1960 66 years and 3 months 6 July 1960 5 August 1960 66 years and 4 months 6 August 1960 5 September 1960 66 years and 5 months 6 September 1960 5 October 1960 66 years and 6 months 6 October 1960 5 November 1960 66 years and 7 months 6 November 1960 5 December 1960 66 years and 8 months 6 December 1960 5 January 1961 66 years and 9 months 6 January 1961 5 February 1961 66 years and 10 months 6 February 1961 5 March 1961 66 years and 11 months 6 March 1961 5 April 1977 67 A further change, increasing the State Pension age from 67 to 68 is expected to take place between 2044 and 2046, although there is a possibility that this change may be brought forward to the 2030s if life expectancies continue to rise at current rates. The state pension age will be reviewed every five years, with the next review due in 2017. Aviva - 5 - v 2016
Increases in payment to the single-tier State pension It s anticipated that the single-tier State pension will increase in payment under the same triple lock guarantee that applies to the basic State pension i.e. the greater or CPI increases, average earning increases or 2.5% pa. Any protected amount (where the foundation amount is greater than the full single-tier State pension) will be revalued and increased in payment in line with CPI. The current maximum single-tier State pension (for 2016/17) is 155.65. Deferring state pension This will remain possible, though conditions, options and rate of increase will all change. These changes will only affect individuals who reach state pension age on or after 6 April 2016; those who reach their state pension age under the current regime will still be able to defer under the current regime after 6 April 2016. The new rules are as follows: The minimum deferral period is nine weeks The rate of increase during deferral will be 1% for every nine weeks of deferral. This is equivalent to an annual rate of 5.8%. A lump sum will not be available. Deferred state pension cannot be inherited by a spouse or civil partner. However, up to three months arrears will be claimable by the deceased person s estate. Class 3A National Insurance Contributions The Government has created a limited opportunity, until 5 April 2017, for those who have already retired to top up their state pension. This allows individuals to purchase extra Additional State Pension. The cost of this extra Additional State Pension is calculated according to the amount of income purchased and the age of the purchaser. It s available from age 63 for women and age 65 for men, in both cases to those who have reached their pension age. It is linked to the CPI and provides a 50% pension to the purchaser s spouse or civil partner on their death. Purchasing this extra ASP has no effect on the purchaser s annual or lifetime allowance, and is not related to their relevant UK earnings. As such, it offers the opportunity to increase their income in retirement to those who no longer have the opportunity to do so significantly via private pension provision. This needs to be weighed against their life expectancy, since this will determine the level of return on the investment represented by the income provided. Aviva - 6 - v 2016
The amounts payable for each additional 1 per week are set out here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/298208/stat e-pension-top-up-pricing-table.csv/preview Entitlement to State Pension based on a spouse s/civil partner s NI contributions Under the pre-6 April 2016 regime, there were three arrangements under which Basic State Pension could be paid to an individual based on a current or former spouse s/civil partner s NI contributions: Category B(L) pension @ 60% of the contributor s Category A pension to married persons or civil partners, payable once both partners reach SPA. This allows the dependant to top up their own entitlement to Category A pension using their entitlement to Category B pension based on the contributor s contributions, up to the full Category B(L) rate. Category B pension available to surviving spouses and civil partners, if the survivor has reached SPA at the death of the contributor. Where the survivor had not reached SPA, they may be entitled to widow s pension or to Widowed Parent s Allowance, depending on their circumstances. Such pensions cease on remarriage, and are not available if the survivor is aged under 45 at the contributor s death if the couple had no dependent children, or when the survivor ceases to be eligible for child benefit in respect of their youngest child. Substituted Category A pension, awarded under the terms of a Pension Sharing Order, or following legal separation or death. Entitlement ceases on the survivor s remarriage or entering a civil partnership before SPA. Following divorce or the dissolution of a civil partnership, any entitlement is only in respect of the part of the partner s NIC record up to the date on which the marriage/civil partnership ended. There were also death benefits available under Additional State Pension. One of the principles behind the single-tier State pension is that pension paid to an individual should be based on their contributions alone. The effect of this is that it will not be possible for individuals to increase their state pension following the death of a spouse/partner in respect of entitlement to the single-tier State pension. Transitional rules are being introduced to maintain the above entitlement at the level it had reached on 5 April 2016 for those who reach their SPA after 5 April 2016. The previous regime will continue to apply where both partners have reached their SPA by then. The way these transitional rules work depends on the record of both contributor and dependant at 6 April 2016, though the effect won t be seen until the event that triggers entitlement, i.e. reaching SPA or death of the contributor or divorce/legal separation/dissolution of civil partnership (which will be referred to as separation in the following text). Aviva - 7 - v 2016
The Category B(L) rules continue to apply, based on the contributor s record to 5 April 2016. Even if the contributor has not made the minimum 10 years contributions to qualify for a single-tier State pension at their own SPA, their dependant can still use the contributor s record to 5 April 2016 to top their Category A entitlement to the level of the full Category B(L) entitlement. No Category A or B entitlement will be available to inherit if the dependant reaches their SPA and the contributor reaches their SPA or dies, or the couple separate, after 5 April 2016. The same is true if the dependant reaches their SPA after 5 April 2016, even if the contributor has already reached their SPA or died by then. In these circumstances, however, if a contributor had any entitlement to Additional State Pension, their dependant is able to inherit this element of the Category B pension as calculated on that date. This is 50% of the S2P entitlement (accrued from 2002 to 2016) and between 50% and 100% of the SERPS entitlement, depending on the date on which the contributor reached, or was due to reach, their SPA. The total State pension that the dependant can receive is limited by a formula, even if inherited entitlement to ASP following the death of the contributor would take them over the level allowed by the formula. This formula is: Full Basic State Pension + Maximum Additional State Pension + Maximum Graduated Pension Benefit units. (All elements to be revalued in line with CPI from 6 April 2016 to the dependant s SPA) Note that this formula makes no distinction between the pension the dependant is entitled to in their own right and what they inherit from the deceased contributor. Other State death benefits N.B. effective from 1 April 2017 The following benefits are being replaced from this particular date (i.e. not 1 April 2016 as originally announced): Widowed Parent s Allowance Bereavement Allowance Bereavement Payment These three benefits are being replaced with a single Bereavement Support Payment, available following bereavement to those under State Pension Age, where the deceased spouse or civil partner paid NICSs other than NI Credits or Class 3 contributions at 25 times the weekly lower earnings limit for any one year prior to death. Aviva - 8 - v 2016
The Bereavement Support Payment will be paid as follows in all cases where it is available: To those with dependent children, 5,000 lump sum followed by 12 monthly instalments of 500; To those without dependent children, 2,500 lump sum followed by 12 monthly instalments of 150. This will not be subject to Income Tax. This interacts with other State Benefits, but there are certain protections: It does not affect entitlement to Universal Credit for 12 months (i.e. throughout the monthly payments); It does not affect Jobseekers Allowance or Employment and Support Allowance. Passported benefits will not be affected. This will not affect benefits already in payment on 1 April 2016. State benefits At present, those whose income in retirement (i.e. after state pension age) is sufficiently small are able to claim two different means-tested benefits, according to their circumstances: Savings Credit and Guaranteed Credit. The full single-tier State pension is set at a level which disqualifies recipients from receiving these benefits. From 6 April 2016, Savings Credit will only be available where one of a couple has already reached state pension age before that date. Guaranteed Credit will remain available, but it will remain means tested, and that test will continue to take into account earned income, State pension and private pension, and will put a value on any uncrystallised pension and other savings above 10,000. As previously mentioned, this will not be available to those on a full single-tier State pension because of the level at which it is set, which is above the cut-off for Guaranteed Credit. Abolition of Defined Benefit contracting-out As the introduction of the single-tier State pension will remove any element of an earningsrelated, additional State pension, it will no longer be possible to contract-out of the additional State pension. Since 6 April 2012, it has only been DB schemes that have been able to contract-out, and from 6 April 2016, they will need to cease contracting-out too. An immediate impact of this will be that with effect from 6 April 2016, where the employer operated a contracted-out DB scheme, both the employer and most employees will be required to pay NICs at a higher rate, as they will no longer be eligible for the for the contracted-out rebate (2015/16 tax year: 3.4% employer, 1.4% employee). The abolition of DB contracting-out will therefore result in increased costs to the employer for operating the DB scheme, and this may lead employers to look to either reduce benefits under the scheme or require higher employee contributions. Aviva - 9 - v 2016
Guaranteed Minimum Pensions (GMPs) GMPs will continue to be held by schemes (unlike the situation when Money Purchase contracting-out was abolished in 2012, when protected rights were simply abolished). However, HMRC is intending to scale back its GMP reconciliation service, and from 2018 will cease to track the responsible paying authority for GMPs as well as ceasing to issue GMP statements when benefits fall due. GMP increases in payment Under current rules, the pension scheme provides part/all of the GMP increase for post 1988 GMPs, with the State full inflation proofing on the pre 1988 GMP, and anything in excess of 3% for the post 1988 GMP. From 6 April 2016 this will no longer be the case. The pension scheme will still be required to provide inflation proofing (capped at 3%) on the post 1988 GMP, but the rest of the GMP is effectively now paid on a level basis. This is somewhat compensated for by the fact that the GMP deduction will be lower under the single-tier State pension system, and that the whole of the single-tier State pension is expected to increase in line with the triple lock guarantee. Aviva - 10 - v 2016