The New State Pension System

[Wensleydale]

It seems that under new rules to be introduced in a few years time in order to receive the state pension then I must have worked for a minimum of 35 years rather than 30. As someone who joined up after University at age 21, and compulsarily retired from the RAF at age 55, then it appears that I am just over a year short. As someone who is currently in a voluntary job, and therefore not receiving payment other than my forces pension and not paying NI contributions, am I going to lose out on £144 a week when I reach age 66? (minus tax of course).

I am sure that this will affect many of us here. Am I correct in my assumptions? At a time when we are being asked by the Government to volunteer to help out in this time of fiscal poverty, am I being penalised for doing my good works?

I am aware that the retirement age for the forces will probably rise to age 60 - however, will those of us caught between rule changes miss out on our pension that we contributed towards for nearly 34 years?

I hope that I am wrong.

[lj101]

I'm guessing you will be able to make voluntary contributions if they increase the contributing years as you've mentioned;

http://www.hmrc.gov.uk/nic/ca5603.pdf

[TRX75]

You will no doubt be pleased to hear that you are wrong, Wensleydale.

See here: Women, low earners and self-employed to benefit under new "Single Tier" pension - DWP which includes:

Key features of the Single Tier pension:

35 qualifying years to receive the full amount

A minimum number of qualifying years (up to 10 years) to get any single tier

If you have 34 qualifying years you will receive 34/35ths of £144.

Edit (with apologies): this last sentence is incorrect - see my further post below regarding the transitional arrangements. You will receive the full pension.

[Tableview]

It seems that these are only proposals although from what I'm hearing they will be adopted.

Assuming they will be adopted, is the following correct in the context of someone who has already paid the currently required 30 years and is therefore entitled to the full state pension under the current legislation?

As you may be aware, there are currently changes being planned to the UK state pension scheme. One of the changes is increasing the number if qualifying years from 30 to 35.
This means effective 2017, if you have only paid 30 years, you will only have the right to 30/35 of the state pension. I'm not sure if we can buy additional years to bring it back up to the minimum required.

[LFFC]

A slightly more complicated question relates to the National Insurance "contracted out" issue.

There was a thread running here a couple of months ago regarding how military pensions are tampered with when you reach retirement age because we were "contracted out" of the state second pension. Will these changes mean that the tampering stops, or a I fear, get worse?

This is the thread: Service Pension Reduction

[TRX75]

Tableview - no I don't believe that is correct. The press release I linked above also says:

All state pension rights accrued under the old system will be recognised, so nobody will lose out on any pension they have earned.

In my view, it therefore follows that anyone who has the currently required 30 years by 2017 will receive the full Single Tier pension.


The White Paper itself (see here: http://www.dwp.gov.uk/docs/single-tier-pension.pdf) gives more detail at Annex 3 on page 91:

12. Those whose National Insurance record under the current system would have a value at the point of implementation of more than the full single-tier pension will receive both a full single-tier pension and a ‘protected payment’ (an additional payment protected against price inflation) to recognise their higher entitlement.

On the matter of voluntary contributions, the White paper says on page 92:

21. Under the current system, those who have gaps in their National Insurance records, for example, as a result of time spent in full-time education, are able to ‘top up’ their records by paying voluntary National Insurance contributions. These do not count towards the additional State Pension.
22. The Government intends to retain voluntary National Insurance contributions. As is currently the case, the cost of those contributions will be kept under review.

[F.O.D]

We need AL R for an expert opinion,

but I waded through the white paper and in the small print, there appears to be a sting in the tail for Public Sector employees who were contracted out. Even if you have worked in the RAF for 35 years, you will not get the full £144 pension. You will be entitled to the greater of your current state pension entitlement (£107) or £144 minus a "rebate derived amount." Steve Webb during questions in Parliament gave the example of a teacher who had always been contracted out. The NI rebate derived deduction will take the amount back down to £107! However, once you pay full contracted in NI contributions, you will earn £4.11 extra for each year's post implementation NI contribution. So after 10 years or so under the new scheme you will get £144, but those who reach state pension age soon after implementation will get the existing pension value

I hope I am wrong but that is how I understand the white paper

Regards

F.O.D

[Onceapilot]

Don't get excited, it will be means tested by whatever government we have in 2020 and anyone on a decent public pension will be getting nothing. They are just making it look sweet for a few years before they move the goalposts again.

OAP

[Party Animal]

And of course on 'Question Time' last week, the Tory blonde celebrity jungle MP mentioned plans for those 'rich/wealthy' pensioners to lose their state pensions altogether. When asked to define rich, she replied that any pensioner with a pensional income of £25k or above, would fall into the bracket...

Watch this space.

[Tableview]

Will the means test be on income only, or on total assets. I realise of course that some assets produce income (or at least, are meant to ..... I wish some of mine did!)

[Melchett01]

And of course on 'Question Time' last week, the Tory blonde celebrity jungle MP mentioned plans for those 'rich/wealthy' pensioners to lose their state pensions altogether. When asked to define rich, she replied that any pensioner with a pensional income of £25k or above, would fall into the bracket...

Watch this space.

Sounds about right. The Government - both this one and previous - make me unspeakably angry with their totally incoherent and disjointed approach to pensions. Actually, anything to do with money. On the one hand they tell us we need to save more for the future, but at the same time their actions do nothing to encourage people. It's the same for the economy in the round - I am just waiting to be told that it's our fault that all these big high street names going into administration because we aren't spending enough. That our income is under constant seige and attack from a pernicious combination of high inflation, exorbitant taxes which are growing at a frightening rate and a political class who think our money is actually their money, all of which combine to reduce spending power seems to have slipped their attention.

So, in preparation for the future and the likely chance of the government screwing me over on the tax and pensions front, I am doing everything I can to actively avoid having to rely on taxable income streams in retirement. ISAs, for now until they move the goal posts, would seem to be the only realistic solution for the average man in the street as they are by and large understandable and importantly provide an income stream that doesn't appear on any tax returns and isn't considered for any other payments, benefits or credits.

All in all, I am deeply deeply concerned by the attitude of our political classes. Their definition of wealthy is so far off the mark that all it does is to demonstrate how out of touch they are. In fact, by Norris' own admission, if 25K is wealthy, then it makes their demands for a 32% payrise on top of their existing 65k basic look like theft. We might all laugh at the fruit loop survivalists you see preparing for the end of the world by hoarding tins of food and water, but frankly becoming a financial survivalist seems to be the only way to stop you ending up being taxed to death and totally reliant on crumbs from the state in your old age.

Or maybe a total subjugation of the population through financial dependency on the government is what the political classes are after.

[cuefaye]

They are just making it look sweet for a few years before they move the
goalposts again

OAP - that can't be true, it smacks of a policy!.

[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.

[Al R]

Melchett,

Or maybe a total subjugation of the population through financial dependency on the government is what the political classes are after.

I wouldn't disagree out of hand with that; if the demands placed upon AFPS and other state defined benefit schemes become less and less, and if the slack is going to be taken over by the state, then we are all going to become dependent more and more on the state, directly.

So, in preparation for the future and the likely chance of the government screwing me over on the tax and pensions front, I am doing everything I can to actively avoid having to rely on taxable income streams in retirement. ISAs, for now until they move the goal posts, would seem to be the only realistic solution for the average man in the street as they are by and large understandable and importantly provide an income stream that doesn't appear on any tax returns and isn't considered for any other payments, benefits or credits.

An ISA absolutely, yes. But not dismissing out of hand either, the potential downsides of other wrappers such as pensions, on/offshore Bonds etc just in case the state moves the goalposts. The thing to remember is that the state has been 'tinkering' as long as anyone can remember. All things in moderation, all things in proportion. An financial plan should be like a battle-group.. with good allround defence and a good offensive capability.

As to Question Time, I think I have tickets for the show this Thursday in Lincoln. Look out for the grumpy old man.

[Bob Viking]

Just a quick question on a related matter. If an individual chose to opt out of child benefit (I didn't) what happens to their 'stay at home' spouse with regard to national insurance contributions? I was under the impression that, whilst in receipt of child benefit, an individual in such a situation would have their NI paid by the government to go towards their state pension. If I opt out does that mean my wife loses out on her state pension? Or have I missed something?!
BV😳

[Al R]

Bob, it shouldn't do - child benefit usually goes to 'mum' anyway and individuals are treated as such for taxation purposes anyway. Anyone aged over 16 gets their NIC paid if they raise a child (up to the age of 12) and a person also gets NIC paid on their behalf if their spouse or civil partner is ".. a member of Her Majesty's forces and you are accompanying them on an assignment outside the UK".

HM Revenue & Customs: National Insurance credits

Not my specialist area though, but I hope that helps.

[Melchett01]

Al,

Will do. Please feel free to ask about government subjugation of the masses through enforced poverty by means of excessive taxation and a total disincentivization to save for old age! I would be delighted to hear their reply. (Actually I wouldn't, it will only make me mad - I'd be delighted to see them up against a wall through a SUSAT!)

[F.O.D]

Al

I looked at the reference you gave for NI credits for spouses of servicemen. Unfortunately, this only applies after 2010. My wife followed me around the World on RAF postings for much of the past 30 years, I got her up to 30 years NI by buying some extra years. Now retrospectively, she has gone from being entitled to a full basic pension to having only 30/35ths of a pension when she reaches state pension age soon after 2017.

I have re-read the White paper and wondered if you can spread any more light on the "rebate derived amount" that they plan to reduce the entitlement of contracted out employees like service personnel?

I feel an angry e-mail to my MP coming on!!!

Regards

F.O.D

[Onceapilot]

I sympathise FOD, many of us are being shafted by these changes, not least the Ladies getting put back from age 60 to...65,66,67?
As I said before, these changes are to make the "new" system look reasonable so that we accept the worse bits then, after the dust settles and everyone forgets the old way, they WILL introduce means testing to cut out anyone who has accrued a decent pension and, IMO, that will include private pensions/income.
The next hit will be health care..."pay what you are able" in 2015!

OAP

[Tourist]

Guys.
I speak as one of the soon to be fisted re my pension.

Surely you can all do basic maths and see that whoever is in power they have to reduce the pensions bill or the country goes bust.

The system does not work for an aging/living unwell for a long time population.

I am planning on getting no state pension whatsoever.

If I can afford without, then why should I get money from those who cannot?

Just because some idiots who cannot do maths decades ago told everybody that the future was rosy for everybody re nhs and pensions does not mean it is true.