Mind the pension gap

Laying the foundation to rebuild the UKís retirement savings system

In May this year, the Queen announced the Pensions Bill, a vital reform that lays the foundation to rebuild the UKís retirement savings system and simplify the State Pension for millions of todayís workers, allowing them to plan their retirement with more certainty.

Flat rate State Pension
The Pensions Bill introduced a flat rate State Pension of at least £144 a week, starting from April 2016. To put this in context, to build up an income of £144 a week (approximately £7,500 a year) a 65-year-old would need a pension pot worth around £185,000 today.

The maximum payout is £144 a week and is based on 35 years’ service. The minimum will be between 7 and 10 years’ service, providing between £29 and £41 per week. Anyone with less than this minimum will not get a State Pension; however, the Minimum Income Guarantee remains as a safety net.

Closing a loophole
In addition, there will be no more inheritance of the State Pension for surviving spouses, divorcees, etc. who reach State Pension age after April 2016. Whether or not someone is entitled to a State Pension will depend entirely on their own years of National Insurance contributions.

Increases due to come into force
There will be a review of the State Pension age in the next Parliament; however, there are already increases due to come into force. By 2018, the State Pension age for women will increase to 65; between 2018 and 2020 the State Pension age for both men and women will increase to 66 and is proposed to increase to 67 by 2028. A further rise to 68 is scheduled to start in 2044 but is likely to happen sooner.

Higher rate of NI contributions
There will no longer be an earnings-related element to the State Pension and the ability to contract out of the second tier pension will be abolished. Final salary pension schemes will end contracting out from April 2016. This ended for money purchase pensions in 2012.
Members will therefore pay a higher rate of employee National Insurance contributions from April 2016. Their employers will also pay a higher rate of employer National Insurance. An employee earning £40,000 a year in a final salary pension scheme will pay approximately £480 a year more.

Who could be affected?
How you may be affected depends on when you’ll reach State Pension age. If it’s before April 2016, you won’t be affected – current rules will apply. If it’s after April 2016, there will be a one-off recalculation of everyone’s State Pension to ensure existing entitlements are protected. Whether you’ll benefit or lose out depends on your circumstances.

Contracting into the second tier pension
If you have a combined entitlement of State and second tier pension worth less than £144 per week (under today’s system), you’ll receive £144 per week if you’ve paid 35 years’ National Insurance contributions.

Contracting out of the second tier pension
If you’ve contracted out of S2P or SERPS, you will have a deduction from the £144 per week. Such deduction will reflect the time spent contracted out and is unlikely to result in an income less than the current basic State Pension of £110.15 a week; however, from 2016 until you reach your State Pension age, you can build additional entitlement, up to a maximum of £144 a week.

Contracted in and contracted out periods
If you’ve been both contracted in and contracted out of S2P or SERPS between 1987 and 2016, you’ll have a one-off deduction based on the length of time you were contracted out; however, you could increase this amount up to a maximum of £144 based on the number of years you pay National Insurance contributions between 2016 and your State Pension age.

Self-employed
The self-employed currently only receive a maximum State Pension of £110.15 per week. This will increase from 2016 to £144 per week for those who have 35 or more qualifying years.

Low earner
If you have combined basic and second tier pensions of less than £144, you’ll benefit from an increase to £144 a week.

High earner
Under the present system you might have accrued a State Pension in theory of up to £250 a week. This will now be reduced to £144 per week (although benefits accrued until 2016 are retained).

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