The New State Pension System

[Al R]

Simplification? The transitional rules alone, to get there make your eyes water.

The state isn't doing this out of the goodness of its own heart; of course it isn’t. The self-employed with no S2P/SERPS record are going to win (not really applicable here) so it should appeal to the Tory heartland. A mum home-keeper (other genders are available!), currently in her 40s/50s who earned taxable income before raising a child up to the age of 12 should benefit (lets not forget the new age at which state pension can be taken) - although you have to put in 10 qualifying years to receive anything AT ALL now.

Those who have spent time out of the workforce, such as mothers and carers of those with disabilities, will also probably benefit in the short-term – but in respect of the younger in the workforce, those currently Flt Lts/Sqn Ldrs? Well, the state will start paying out less in overall benefits in 2047, so it stands to reason people retiring after then, are going to lose out.. in other words, those born after 1980 or so.. the so-called Millennium generation.

From 2017, the state is scrapping contracting out for final salary schemes which, as members of AFPS, you are anyway. In other words, you pay basic Class One National Insurance Contributions (NIC) to entitle you to the basic state pension. There are two rates of Class One NIC: the ‘contracted in’ and ‘contracted out’ rate. You pay the lower ‘contracted out’ rate and you accrue credits towards the Basic State Pension only; those who pay the higher ‘contracted in’ rate earn credits not only towards a Basic State Pension, but also towards an Additional State Pension, currently known as the State Second Pension. It is this benefit which is being scrapped.

However, so that you get more than your basic state pension entitlement, you will have had contributions made on your behalf into (all/some of..) Graduated Pension Scheme, SERPS or S2P. This means you can pay the lower contracted out rate, so only have credits towards a Basic State Pension, and nothing in the way of State Second Pension entitlement. However, AFPS gets a rebate from the state into in recognition of the fact that it will not have to bear the cost of the additional State Second Pension. Yes, AFPS is unfunded, but the rebate is still a ‘paper’ credit but in order for AFPS to continue to be trusted enough by the state to be able to contract out, it must be capable of paying pensions to members that are at least equal to the Guaranteed Minimum Pension rates which loosely speaking, must be 'broadly equivalent' to the amount the member would have received had they not been contracted out.

But, if you accrued protected rights will cease to have any special significance, and will be no different from any other retirement benefits. The Government ‘recognises’ (which is nice) that ending contracting out will have a ‘range of implications’ for employers, employees and schemes such as AFPS. For the MoD, the end of contracting out will have cost implications, the largest of which will be the need to start paying the standard rate of Class One NIC.

This would ordinarily mean an increase for the employer, for each contracted-out employee of 3.4% or so of relevant earnings, between the lower earnings limit (£5,564) and the upper accrual point (£40,040). Reading the DWP paper last night, many employers are going to be free to do this without trustee consent, so it’s a fair bet to assume that the cost has been padded into TACOS and AFPS revised terms.. watch and shoot for that to prove too expensive again in 5-7 years or so? It could be that though, that AFPS does become a smaller component in a military retiree's pension, and the slack is taken over by the state. Worrying in itself?

So, contracted-out employees will be brought fully back into the state system and should/could start to pay full National Insurance contributions – an increase of about 1.4% of relevant earnings. However, around 90% of those reaching State Pension age in the first two decades after implementation will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension.

The state is making noises about ‘foundation’ amounts being ring-fenced to secure outcomes. Under those eye watering transition rules, those reaching their State Pension age after the implementation of this new single-tier pension will fall into four distinct groups;

1. Individuals with a foundation amount which is equal to the full level of the single-tier pension. These are likely to be people who have the necessary 35 qualifying years, little additional State Pension and have not been contracted out.
2. Individuals with a foundation amount which is less than the full level of the single-tier pension. These are likely to be younger people, with fewer qualifying years, or older people who have spent many years contracted out of the additional State Pension and not in a defined benefit scheme such as AFPS. These people will be able to increase their single-tier pension up to the full level, at the rate of 1/35th of the full rate (£4.11 to the nearest penny) for each additional qualifying year they gain before reaching their State Pension age.
3. Individuals with a foundation amount which is more than the full level of the single-tier pension. These are likely to be older people with many qualifying years, and who have not spent significant periods contracted out of the additional State Pension. These people will receive the difference between their foundation amount and the full single-tier amount as an extra payment on top of the full single-tier weekly amount.
4. Individuals with no pre-implementation National Insurance record. The simpler and easier to understand single-tier system will give them long term clarity of outcome. They will also be supported to save into a workplace pension scheme through automatic enrolment and the policy measures set out in the Government’s ‘Reinvigorating Workplace Pensions’ document throughout all of their working lives.

Finally, I am supposed to provide advice based on as full an understanding as possible of all relevant legislation pertinent at the time that it's given and not predicated upon future change and/or speculation. The problem is, the state doesn’t even know – the reason that this announcement was delayed was because gorgeous George and IDS (I have a lot of time for him) were having a bun-fight about affordability. If the new state benefit is going to be linked to life expectancy, with people getting state pension for the same proportion of their lives as they do now (hands up if you know what proportion of your life you get state pension now, let alone in the future?).

Whatever you do, do something, go and see the bank, your IFA, have a chat with a mate you trust.. but do something – the writing (if you ever needed to be reminded) IS on the wall. Whether its starting an additional personal pension for your partner and/or yourself, checking out that your money and portfolio are well suited for the future and working well, that you are properly protected should your savings come under threat they are going to be secure, whether it involves hitting the person in the bank into getting you the best rate.. do something. Especially if you're in your 20s, 30s and early 40s if you haven't started planning properly. I joined up 30 years ago this week. I didn't have a clue about wealthcare and it took me a while to latch on. But I am of an age where I had the luxury of a decent pension and not having to pay out for baby boomers as long as the Millennium Generation has to. Those 20 years younger than me don't have that luxury, so do something.

Right, Cranwell and Waddington this week so fingers crossed for clear roads. If anyone has any questions or worries, please just drop me a line. If I can, I'm happy to help.