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State pension provision developments: an introductory guide

ARTICLE — 7 Jan 2015

Nigel Oakley

Nigel Oakley

Head of Technical Services

State pension provision

The current system of state pension consists of:

  • The basic State Pension, the full amount of which is currently £113.10 per week (to a single person). The full amount is available to those with 30 or more years of National Insurance contributions (or recognised credits)
  • The State Second Pension, which is an extra pension based on factors such as a person’s National Insurance contributions and level of earnings. It acts as a top up of the Basic State Pension.

These benefits are payable from State Pension age, which is currently age 65 for a man and is increasing to age 65 for a woman over the period to November 2018. The State Pension age will increase further from December 2018.

It has been possible for members of some workplace pension schemes to “contract-out” of the State Second Pension, which means that their workplace pension scheme effectively pays some of the benefits that the State Second Pension would pay and the individual pays a lower rate of National Insurance contributions as a consequence.

A brief summary of some current developments relating to state pensions are set out below and further information about both the current system and changes to it can be found on the government’s website at https://www.gov.uk/browse/working/state-pension.

Implementation of the single-tier pension

A single tier state pension will replace the current two-component system of the basic State Pension and the State Second Pension from 6 April 2016. The new State Pension will just apply for those reaching State Pension age on or after this date.

The starting level of the new State Pension will be set in autumn 2015 and the full pension will be no less than £148.40 per week. The actual amount payable to an individual will be based on his or her National Insurance record, with 10 qualifying years required to get any new State Pension and 35 years required to get the full amount.

The amount of new State Pension built up to 5 April 2016 will be based on transitional rules set out in legislation.

The end of contracting-out

To reflect the end of the State Second Pension for those reaching State Pension age on or after 6 April 2016, contracting-out will end at that time. Both employees in contracted schemes and their employers will be facing rises in National Insurance contributions from 6 April 2016 as a consequence.

Changes to the State Pension age

The State Pension age is scheduled to increase to age 67 as follows:

  • Over the period from December 2018 to October 2020, the State Pension age will increase from age 65 to age 66;
  • Over the period from April 2026 to March 2028, the State Pension age will increase from age 66 to age 67; and

Beyond these changes, there will be regular reviews of the State Pension age to consider the timetable for future increases. These reviews are to take place at least once every five years with the first taking place by 7 May 2017.

The government has indicated that, as a consequence of the reviews, the State Pension age may rise to age 68 by the mid-2030s and to age 69 by the late 2040s.

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