The government is to bring forward its plans to introduce a new single-tier £144 per week state pension by one year.
On the BBC’s Andrew Marr Show on 17 March, Chancellor George Osborne said the new state pension would be introduced in 2016 rather than 2017 as originally planned.
He added: “People understand, by the way, that of course we’re all having to work longer because everyone’s ageing more and we’ve had difficult decisions on the state pension age.
“That means that we can afford to be generous with our pensions, with our pension benefit.
“It’s by taking those sort of long-term decisions about the cost of our welfare system for our country that we can actually afford to support people who do the right thing.”
On 14 January, the government announced its plans to bring in the new state pension from 2017.
The government appears to have had second thoughts about the timing of the new state pension, which under the current timetable would have been available only to those reaching their state pension age (SPA) on or after 6 April 2017.
The decision to bring this in a year earlier from 6 April 2016 has undoubtedly been influenced by the criticism the government has received about the estimated 85,000 women who would not have been in the frame for the new pension in consequence of having had their state pension age (SPA) advanced (twice) in recent years.
The decision will be welcome news for those many women (and, of course some men as well) who stand to gain from an increase in the basic state pension in current prices from £107.45pw to £144pw for the single-tier. The single-tier will now be available for men born on or after 6 April 1951 and for women born on or after 6 April 1953.
It must be pointed out, however, that not all these individuals stand to gain financially from the changed dates. Some would have qualified for a total pension of more than £144pw anyway by virtue of having accrued rights to the state second pension (formerly SERPS) – this will still be recognised by a ‘Protected Payment’ excess addition on top of the single-tier pension. And some may get less than £144 as they will now have to meet an increased national insurance requirement of 35 (up from 30) qualifying years to receive a full pension.
This is not quite the big government ‘give-away’ it may first seem to be. There will be a windfall £5.5 billion extra national insurance (NI) contributions one year earlier from the abolition of contracting-out from defined benefit pension schemes and savings from changes to other rules affecting new pensioners, notably the scrapping of the savings credit element of pension credit.
Also, both sponsors and members of defined benefit schemes will have to come to terms with the loss of their NI rebates in 2016 instead of 2017. A typical worker earning the average salary of £25,000 will pay an extra £270 a year with the employer having to stump up £657. This will inevitably put extra pressure in particular on those private sector employers that are currently struggling to support their pension arrangements and may be tempted to water down or, as a last straw, wind-up their schemes completely.
Overall, therefore, the government’s rethink should not be viewed as a panacea. It will be good news for many, but not for everyone.
This will be welcome news for the tens of thousands of women who would have missed out on the higher state pension as a result of reaching their state pension age just months before the introduction of the new terms.
The pensions system is highly complex and this announcement will have knock-on consequences, notably for final salary scheme members who are likely to see their scheme terms adjusted a year earlier.
It also illustrates the unpredictability of the pension outcomes, whether from changing investment conditions or from the government changing the rules. Pension providers have an important role to play in helping pension members to adapt their arrangements in the face of these constantly changing circumstances.
We are squarely in favour of these vital reforms, but the government must ensure that the implementation of these changes is workable for pension funds. This is a very tight timeframe and we have to wonder if it can be delivered.
If the government gets it wrong then this runs the risk of sparking a fresh round of final salary pension closures in the private sector. Businesses that get caught on the wrong side of these changes will lose a significant rebate from the end of contracting out, and they will question whether they want to continue running these pensions. It is essential to give pension funds the flexibility and time to adapt and make the changes.
We have waited many years for these reforms. An overhaul of the state pension is long overdue and this simpler, fairer system helps set a clear foundation on which people can build their own savings. It would be a shame if big mistakes were made in a rush to implement the changes.
I was born on 1 March 1953 and have paid in to the system for a full stamp for 44 years. I retired on 1 March 2013. I do agree with the pension age rising to be the same as men, but I am not happy to wait 3 years for what is a vastly inferior pension. They have lost my vote.
Gwen Lovell
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