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Oval Workplace Benefits Support, motivate and reward your people

June 2013

Flat Rate State Pension Key points Flat Rate pension of £144 per week to be introduced from 2016. Second State Pension to be abolished. Contracting-out will cease for Defined Benefit schemes. Qualification to be on an individual basis, not on partner’s National Insurance (NI) record. There will be winners and losers. Entitlement to pensions already built up will be honoured but those who have already accrued more than £144 will not gain more State pension from future employment.

In January 2013, the Government announced details of its intention to replace the current complex, multi-tiered State pension structure, with a simple single-tier benefit, likely to be £144 per week (£7,500 a year) in 2012/13 terms. The intention is that it will be increased annually in line with the ‘triple lock’ (highest of growth in prices, average earnings or 2.5%). The present State Second Pension (S2P) will be scrapped, as inevitably will the ability for Defined Benefit (Final Salary) schemes to contract-out – the cost implications here might in itself lead employers to review benefit levels or even the continued existence of such schemes. It is proposed that people will have to make 35 years of ‘qualifying’ NI contributions to gain full entitlement. Importantly there is also to be a minimum contribution requirement of 10 years. These figures are based on NI records from the implementation date of the new single tier pension. There will be a transitional arrangement to recognise people’s NI records prior to the implementation date; the basic premise being that each of the components of State pension will be added together to see whether or not they would exceed £144 pw. Entitlements to State pensions already built up will be honoured but those who have already accrued over £144 per week will not see an increase. There are other groups who might either gain or lose under these new proposals.

It is proposed that these changes will come into effect from 2016. Winners

Losers

Stay at home mothers and carers – will have a notional credit towards State entitlement.

Final salary scheme members face higher NI contributions and/lower benefits.

The self-employed – presently not entitled to earnings related State second pension.

Existing pensioners (A person who is in receipt of a State Pension).

Low earners – means tested, pension credit often not claimed.

High earners in mid to late career, with entitlement in excess of £144 pw.

Everyone will be affected in different ways. However, one fact is common for all; it will create a simple, easy to understand baseline pension, and at the margins is likely to have a positive effect on workers willingness to invest more appropriately for their retirement. The fine detail of the Flat rate pension will only emerge over time but below we give our understanding of some of the logical questions which individuals may be thinking about.


Questions and Answers Will people who reach their State pension age after April 2016 and who would have been entitled to receive a bigger pension under the previous arrangements (from a combination of the basic state pension and S2P/Serps) be restricted to the flat rate pension? No – they will receive the higher figure of the two figures. They will get the full level of the single-tier pension plus a “protected payment” on top to make up the difference. If I receive my state pension in 2014 and have 36 years’ National Insurance Contributions will I then receive the new pension rate from 2016 onwards? No, those already in receipt of a pension should be unaffected by these changes. If I have delayed taking my state pension until a later date before age 65 and instead opted for an enhanced pension, which I now receive at £149 per week, will this pension continue to increase in line with inflation once the new scheme is introduced in 2016? Yes it will. Your Basic State Pension, including any extra you received from your delay in claiming, is covered by the so called triple lock – this means it increases in line with the greater of the annual rise in average earnings, prices, as measured by the consumer price index (CPI) or 2.5%. However, any additional pension you may have from the state second pension (S2P, formerly SERPS) or the older graduated retirement benefit scheme will only increase in line with CPI.

Once the new single tier starts in 2016, will there still be an option to delay claiming it in order to receive a bigger pension? Yes – but on less generous terms than today. Instead of receiving an increase in the pension rate of 1% for every 5 weeks of deferment, it will only be 1% for every 10 weeks. The right to opt for cash lump sum for delaying for one year or more will also be abolished for new pensioners after April 2016. Are all the proposals in the pension bill ‘written in stone’ or can we expect further changes before it is finally implemented? It is highly likely that the Bill will be subject to a number of changes in detail as it passes through the various parliamentary stages but the broad thrust of the proposals will be brought into law. Will women within 15 years of State Pension Age be able to retain the right to rely on their husband’s National Insurance (NI) contributions for their State Pension? There is still a question mark over whether women within 15 years of retirement should be allowed to retain this right, and the Select Committee has urged the government to assess and publish the cost of doing so.

Would you like to talk? If you have any questions or would like to explore how you can make your insurance work harder for your organisation, we’re here to help. Call Nick Allen, Head of Workplace Benefits on: 0117 3006161 Or drop him an email at: nick.allen@theovalgroup.com Oval Financial Services Limited Registered office: 9 South Parade, Wakefield, WF1 1LR Registered in England No: 02192234 Authorised and regulated by the Financial Conduct Authority

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Flat Rate State Pensions