The new State Pension is nearly upon us. The full flat rate single tier pension will be worth £155.65 per week for people who reach State Pension age after 5 April 2016. However there are a number of areas where there is misunderstanding about the change.
Calculation of pension
Not everyone will be entitled to the full rate of single tier pension. The transitional arrangements are very complex and some people retiring in 2016 will only be entitled to a State Pension at the level of the basic State Pension (£119.30 per week from April).
At 5 April 2016, a calculation will be performed by the Department for Work and Pensions (the Future Pension Centre) for each individual to ascertain their “foundation amount”.
This is the greater of:
- Benefits built up under the current basic State Pension plus benefits earned under the Additional State Pension from SERPS/S2P, with a reduction applied for periods of contracted-out service. This is broadly (years to date/30 x £119.30) plus any additional State Pension built up while contracted-in.
and
- Benefits which would have built up under the new system, with a reduction applied for periods of contracted-out service. The contracted-out adjustment is broadly equivalent to any Guaranteed Minimum Pension (GMP) for pre 97 service and the S2P benefit for post 97 service. The calculation is broadly (years to date/35 x £151) less the contracted out adjustment.
Where individuals have been contracted-out for significant periods, the second calculation is likely to be lower than the first. This means that people who have always been contracted-out and retire soon after the transition date will only be entitled to a State Pension at the level of the basic State Pension, although these individuals should have an additional pension from their employer’s scheme.
Where the foundation amount calculated is larger than the single tier pension, individuals will be entitled to the higher amount, but the increases in payment on the pension above the single tier pension (called the Protected Payment) are not subject to the “triple lock” increase basis, rather the increase in the Consumer Prices Index (CPI).
Where the foundation amount is less than the single tier pension, individuals can build up additional State Pension at the rate of 1/35th of the single tier pension for each year from 2016.
Pension increases
Another consequence of the way the single tier pension is calculated is that individuals will no longer receive a top-up to their scheme GMP increase from the State.
Under the current system, individuals are paid the difference between the total Additional State Pension they would have earned if they had not been contracted-out, and the amount of the pension the individual is deemed to receive as a result of contracting-out.
The whole Additional State Pension increases in line with CPI whereas occupational pension schemes are not required to increase pre 88 GMP and only have to increase post 88 GMP in line with CPI to a maximum of 3% p.a. Therefore, over time, the State will effectively provide increases on the GMP. However, going forward the comparison between the level of Additional State Pension and GMP is effectively included as a one-off calculation within the calculation of the foundation amount at April 2016, before the GMP has come into payment, and hence allowance for future increases is lost.
Pensions for spouses and civil partners
The current system allows spouses and civil partners who haven’t made sufficient National Insurance contributions in their own right to use their partners’ records to increase their own State Pension.
The single tier pension will be based on each individual’s National Insurance record with a few transitional reliefs:
- If the spouse or civil partner reaches State Pension age before April 2016, then they will retain the old methodology for calculating their own State Pension.
- If the contributing partner reaches State Pension age before April 2016, but the spouse or civil partner is under State Pension age at that date, the spouse or civil partner will receive a single tier pension using their own contribution record, but on their partner’s death, will receive 50% of any additional State Pension.
- If both partners reach State Pension age after April 2016, then any Protected Payment will have a 50% spouse’s/civil partner’s pension attached.
- For a woman who had a reduced rate election in force 35 years before she reaches State Pension age, the single tier pension will not be less than the safeguarded amount (currently £69.50 per week)
The Future Pension Centre
Individuals who reach State Pension age within the next month can apply for a calculation by contacting the Pension Service at https://www.gov.uk/future-pension-centre.
For those reaching State Pension age in more than one month’s time can approach the Future Pension Centre at https://www.gov.uk/contact-pension-service.
Katherine Ball
Principal Consultant & Actuary