State pensions: your questions answered

By Malcolm Mclean
Barnett Waddingham

Image caption,
The state pension will rise but you will have to wait longer to get it

Several very big changes have been proposed to the UK's pension system in the past few weeks.

In the public sector, inflation proofing will be weakened by using the consumer prices index (CPI) to uprate pensions each year.

By 2016 all firms will have to offer their staff a pension scheme. Higher paid pension savers will lose some of the tax relief they gain on their pension contributions.

Public sector schemes may require members to pay more. And the state pension age will now rise to 66 by 2020.

Last week we asked you to send in your questions for Malcolm Mclean of the actuarial firm Barnett Waddingham to answer.

A large number were about the government's plans for the state pension and Malcolm tackles them this week.

Next week he will answer your other questions about the private and public sector pension systems.

It is important to note that how and when any new increased state pension will be introduced has not been fully defined at this stage.

It emerged only recently that the government is considering introducing a single state pension of about £140 per week.

This will replace the existing patchwork of payments that are payable to people of pension age and which are themselves confusing and expensive to administer.

Details are still sketchy, but the Department for Work and Pensions (DWP) has indicated that the change is likely to apply to future pensioners.

Those already receiving (or eligible to receive) their state pension prior to the start of the new arrangements will not be included.

It is understood that, for the moment at least, qualification for the new pension will still depend on the payment or crediting of national insurance contributions.

Pension Credit and other means-tested benefits will also continue and will still be available for those who need to claim them.

It is expected that these changes will not come into force before 2015, will not be retrospective and will not therefore apply to Cynthia or Stewart or indeed any other existing pensioner.

Further details will be included in a government Green Paper before the end of the year.

Image caption,
Parts of the government's plans are not yet known, says Malcolm Mclean

As explained in the answer to the previous questions, the changes will not apply to existing pensioners and current pensions in excess of £140 a week will, I am sure, continue to be paid as now.

Again, details are not yet available.

However, it would seem very unfair if those people who had built up an entitlement to SERPS/S2P were not to benefit whilst those who had opted out (commonly known as contracted out) were allowed to keep the rebates that had been paid into their private pensions or given in the form of a reduction in their national insurance contributions.

The alternatives would appear to be either to allow for the SERPS/S2P entitlements to be paid in addition to the new £140 pension, or not to do so but make a deduction from the £140 pension to reflect the years in which rebates had been given to those who had contracted out.

No doubt this will be an issue for debate in the forthcoming Green Paper.

The previous government had already decided that contracting-out into personal pensions and for non-salary-related occupational pensions would end in 2012 or shortly after.

The effect of the new government's wide-ranging changes to state benefits, if confirmed, will probably mean that contracting-out via final-salary type schemes will also come to an end, albeit from a later date than 2012.

There have been no indications that the current arrangements for delaying taking your state pension after state pension age will come to an end although, again, the subject may well feature in the forthcoming Green Paper.

By delaying receipt of your state pension, the current rules give you two options.

The first is to receive an enhanced rate of state pension of 1% for every five weeks that you delay taking the pension, equating to 10.4% for a full year delay.

The second option, if you delay taking the pension for at least 12 months, is for you to take the money back in the form of a taxable cash lump sum.

This will comprise of all the pension you have not drawn, with interest added.

The rate of interest used will be 2% above the Bank of England base rate.

Image caption,
Nearly five million people will be affected by the acceleration of the raising of the state pension age

The question of whether you are actually drawing your pensions and/or whether you have retired from work is unlikely to be the issue.

It will almost certainly be your date of birth and your actual state pension age which will determine whether your pension entitlement will be established under the old rules or the new ones whenever they come in.

Women's state pension age was in the process of being gradually brought in line with men's, so that by 2020 men and women would have the same state pension age of 65.

Further changes envisaged that pension age for both men and women would increase from 65 to 66 progressively between 6 April 2024 and 5 April 2026.

The coalition government has now announced that it intends to accelerate the move to age 66 for both men and women.

The new proposals will increase women's state pension age to 65 more quickly than previously planned, by adjusting the timetable from April 2016 so that women's state pension age will reach 65 by November 2018.

Between December 2018 and April 2020, men and women's state pension ages will then increase from 65 to 66.

The government is also considering the timetable for future increases to the state pension age from 66 to 68.

Any change to the timetable would require the approval of Parliament.

Legislation giving effect to the more immediate changes is likely to come into effect in 2011.

State retirement age calculators for use by individuals, such as the one available on the Pensions Advisory Service website will doubtless be amended in due course.

To be eligible for the full basic state pension, you need to have 30 "qualifying years".

A qualifying year is one for which you have paid, or had credited to you, enough national insurance contributions for it to count as a qualifying year.

Credits are available if you are receiving certain social security benefits, such as contributory job seekers allowance or incapacity benefit, or have caring responsibilities for children or elderly relatives.

It is possible to pay top-up contributions to achieve a full basic state pension.

To find out whether you can or should make these voluntary contributions, you should first obtain a forecast of your state pension entitlement which will indicate, amongst other things, where the gaps are in your record and how you can make them good.

Bear in mind that if you exceed the 30 qualifying years, you will not be entitled to a refund on the excess contributions made.

You can apply for a forecast by telephoning 0845 300 0168 or online at

I understand the point that is being made, but pension credit and other means-tested benefits are designed to give people a minimum level of income which others on higher incomes already exceed.

In a sense, the present situation is unsatisfactory in that the pension credit threshold is higher than the basic state pension.

It would make sense if the situation was reversed, ie if the basic state pension was higher than the pension credit.

Pension credit would then effectively be a safety net to catch those who did not qualify for a full basic state pension.

This is probably one of the reasons, if not the main reason, why the government might like to see a state pension of £140 per week which would exceed the current pension credit minimum income guarantee of £132.60 per week and thus reduce the need for means-tested top-ups.

It also has a read-across for the plans recently confirmed by the government to introduce auto-enrolment into workplace pensions and a National Employment Savings Trust (NEST).

This will start in October 2012 and will be phased in by October 2016.

One of the criticisms that has been made of these plans has been that many low-paid earners would not benefit fully from staying in such an arrangement because of the potential loss of means-tested benefits that could result.

Paying a state pension at or about £140 per week could dispel some of these concerns and encourage many low-paid workers not to opt out.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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