New Single-Tier State Pension

The new single-tier State Pension is due to come into force in April 2016.

This marks one of the most significant changes for decades with regard to the state pension system.

Currently, the state pension is very complex, with a combination of a basic state pension and various earnings-related top-ups which have developed over the years, such as graduated pension, SERPS and S2P. Many people have been allowed to ‘contract out’ of these top-up arrangements, diverting their NI contributions into private pensions or enhanced occupational pensions. This has added to the layers of complexity.

This confused system will be swept away and replaced with a single flat-rate state pension payment based on qualifying years of contributions, ie. NI record. There will be no opportunity to build up an enhanced state pension, although anyone who has accrued benefits under the old system will receive these at retirement, so in practice it will take some time for the new system to replace completely the current regime.

Currently, 30 years of NI contributions are required for a full basic state pension; this will rise to 35 years under the new single tier system. Also, in general, it will no longer be possible to claim a state pension based on an ex-spouse’s NI record and widows or widowers will no longer be able to inherit a partner’s pension.

The new single-tier State pension is expected to be set just above the basic level of means-tested support, currently £151.20 per week for Pension Credit.

Contracting-out will end for occupational pensions, so this may accelerate closures of final salary pensions. Anyone who was contracted out will have a deduction from their new single tier pension to reflect the fact that pension entitlement will be provided partly by a private scheme.

It will remain possible to defer drawing a state pension, but the terms will be made less generous and there will no longer be a lump sum option.

It is expected that the new single-tier state pension will benefit the self-employed, women who have spent time out of the labour market, carers and the low paid, whilst it is likely to be disadvantageous for high earners, private final salary scheme members, younger people and existing pensioners.

The new state pension is expected to be broadly cost neutral for the government until 2040, after which time it should result in cost savings for the government.

[This article is for information only and does not constitute advice. If you would like advice, please get in touch on 01392 875500 or info@SeabrookClark.co.uk]

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