Introducing a simple, single-tier State Pension
The government published ‘The single-tier pension: a simple foundation for saving’ on 14 January 2013. On 18 March 2013 the government announced that the single-tier pension will be brought in on 6 April 2016 and will affect people who reach State Pension age from that date. Current pensioners and those reaching State Pension age before the introduction date will receive their State Pension based on existing rules.
The single-tier pension will replace the State Second Pension, contracting-out and outdated additions, such as the Category D pension and the Age Addition. The Savings Credit element of Pension Credit will also close to pensioners who reach State Pension age after the introduction of the single-tier pension.
The new pension will make it easier for people to understand what they need to save for their retirement. It will also support the introduction of automatic enrolment into workplace pensions which we introduced in October 2012.
Above the basic level of means-tested support
The single-tier pension will be set above the basic level of means-tested support (the Pension Credit Standard Minimum Guarantee, £145.40 per week for a single pensioner in 2013/14). The current legislative requirement to increase the basic State Pension at least in line with average growth in earnings will also apply to the single-tier pension. This means that it will stay above the level of means-tested support over the long term.
State Second Pension
Closing the State Second Pension is an important part of the single-tier reforms. Contracting out of the State Second Pension for Defined Benefit schemes will therefore come to an end. Contracting out means giving up entitlement to the State Second Pension in return for a broadly similar occupational pension and a lower National Insurance (NI) rate for employer and employee.
Under the single-tier proposals, all employees will pay the same rate of National Insurance and become entitled to State Pension in the same way. The State Pension system will be significantly simpler as a result.
The single-tier pension will require 35 qualifying years of National Insurance contributions (NICs) or credits for the full amount. There will also be a minimum qualifying period of between 7 and 10 qualifying years.
Those with less than 35 qualifying years but more than the minimum qualifying period will receive a proportionally smaller single-tier amount.
We will put in place transitional arrangements to recognise people’s National Insurance contribution records before the implementation date.
Inheritance and deferral
The new pension will be based on individual qualification, without the facility to inherit or derive entitlement to the State Pension from the National Insurance record of a spouse or civil partner (although there will be some limited transitional arrangements). It will continue to allow people to defer (put off) claiming their State Pension and receive a higher weekly State Pension in return.
The deferral rate will be finalised closer to implementation. It will no longer be possible to receive deferred State Pension as a lump-sum payment.
State Pension age
‘The single-tier pension: a simple foundation for saving’ also includes proposals for a regular and structured mechanism with which to consider changes to the State Pension age in the future.
We’ve published a number of supporting documents with further detail on particular elements of the single-tier pension.