The pensions tax regime KEY GUIDES The Current State Pensions System Last reviewed: 28th Feb 2017 Alliotts, Chartered Accountants & Business Advisors Imperial House, 15-19 Kingsway, London, WC2B 6UN T: +44 (0)20 7240 9971 F: +44 (0)20 7240 9692 E: london@alliotts.com Friary Court, 13-21 High Street, Guildford, Surrey, GU1 3DL T: +44 (0)1483 533 119 F: +44 (0)1483 537 339 E: guildford@alliotts.com www.alliotts.com A Worldwide Alliance of Independent
THE CURRENT STATE PENSION SYSTEM In 2002, the then Government set up the Pensions Commission, chaired by Lord Turner, to review the UK pensions system. The Commission issued two reports and a final statement in April 2006. In response to the Commission s ideas, the Department for Work and Pensions (DWP) produced the Pensions Act 2007 and Pensions Act 2008. In 2011, a further Pensions Act was passed by the new government and the DWP published a Green Paper on state pension reform, setting out options for a simplified state pension system. After a period of consultation, a new regime has now been legislated for in the Pensions Act 2014. What follows is a brief summary of the main changes made by the Pensions Acts to date to the provision of state pensions. The new single-tier state pension regime, beginning in April 2016, is considered elsewhere. That system will guarantee that you do not lose pension accrued under the existing state pension rules, so the regime in force today will have relevance well beyond 2016. Basic state pension Since 6 April 2010, revised contribution conditions have applied to benefit entitlement for those reaching state pension age (SPA): The number of qualifying years for entitlement to a full basic state pension (BSP) has fallen to 30 for both men and women. The previous requirement was 44 years for a man and between 39 and 44 years for a woman, depending upon her SPA. The DWP estimates that the change meant that, in 2010, 75% of women were entitled to the full basic state pension against 50% if there had been no reform. There is a proportionate pension for any period of qualifying years, whereas previously there was no entitlement for less than 11 years (ten years for women born before 6 October 1952). The rules for home responsibilities protection were changed, so that ultimately the number of qualifying years for a full pension cannot be reduced below 22 (against 20 under the previous rules). There were two consequences of the shorter qualifying period: Class 3 voluntary National Insurance Contributions (NICs) may no longer be necessary for many early retired people. The rate of Class 3 contributions has increased sharply to 14.10 in 2015/16 (and 2016/17). The adult dependency increase (ADI worth 65.70 in 2015/16 and 2016/17), which was generally payable to a husband in respect of a wife below SPA, was abolished for those reaching SPA from 6 April 2010. This removed the right of civil partners and women to benefit from this payment on the very date that they were first due to become eligible. If the ADI was in payment on 5 April 2010, it will be protected for a maximum of ten years. The coalition Government introduced a triple lock on basic state pension increases from April 2011 and this has been continued by the Conservative government for the duration of the current parliament. The annual pension increase will be the greater of: inflation (as measured by the consumer prices index (CPI)); earnings growth; and 2.5%. All Rights Reserved Page 1 of 4
April 2016 s increase has been set at 2.9%, as the level of CPI inflation in the year to September 2015 was -0.1%% and earnings growth was 2.9%. The triple lock does not apply to widowed mother s allowance, widow s pension, widowed parent s allowance, bereavement allowance and SERPS/S2P, all of which had a CPI link from April 2011 and will therefore not increase at all in April 2016. State pension age The Pensions Act 2007 detailed the framework for three increases to SPA, i.e. by one year (to 66) over a two-year period from 2024, and then again in 2034/36 and in 2044/46, leaving the SPA at 68. These numbers have since been completely overtaken by events. As part of the Comprehensive Spending Review, the Government announced that a SPA of 66 would come into effect from April 2020, six years earlier than previously planned. After considerable lobbying, the implementation date was pushed out to October 2020 in the Pensions Act 2011. The move meant a revision of the previous phasing in of higher SPAs for women, which started in April 2010 and had been due to raise women s SPA to 65 by April 2020. Until March 2016, the phasing in process works as originally planned, adding one month to the SPA every two months. The pace then increases, adding three months to the SPA every four months. As a result, women s SPA will reach 65 matching men s by November 2018. From December 2018, a one month for every two SPA adjustment will apply for both sexes, bringing the SPA to a universal 66 by October 2020. The change means corresponding amendments for entitlement to various social security benefits, e.g. attendance allowance and incapacity benefits, to take account of the higher SPA. The Pensions Act 2014 further increases the SPA to 67 between April 2026 and April 2028. The Act also contains provisions for periodic reviews of SPA, based on changing life expectancy. The Office for Budget Responsibility (OBR) now has a central projection that SPA will reach 70 in 2063, as shown in the graph below. 71 70 69 68 67 66 65 64 Projected State Pension Age All Rights Reserved Page 2 of 4
Pension credit The Guarantee Credit (GC what used to be the Minimum Income Guarantee) will rise each year by the same cash amount as the basic state pension. Before April 2011 it had been earnings-linked. As a result of the 2010 Comprehensive Spending Review, the maximum Savings Credit (SC) top up has been declining in recent years. For 2015/16 the standard GC is 151.20 a week for a single person and 230.85 a week for a married couple ( 155.60 and 237.55 in 2016/17). The maximum SC in 2015/16 is 14.82 for a single person and 17.43 a week for a married couple ( 13.07 and 14.75 in 2016/17). State Second Pension The current two-band structure with differing accrual rates for the second state pension (S2P) is: Annual earnings band Accrual rate 5,824 15,300 1.80 a week each tax year 15,300 40,040 10% of band earnings The Pensions Act 2007 contained three changes to S2P: Since 6 April 2009, the upper level of earnings to which S2P applies (the upper accrual point UAP) has been frozen at 40,040. However, the Pensions Act 2014 will mean that S2P disappears in April 2016. Three bands of accrual (40%, 10% and 20%) were reduced to two from 2010/11, with the 10% accrual rate applying to both earnings bands above the LET. This accelerated what would have happened in a few years in any case, because of the introduction of the upper accrual point. The band between the lower earnings limit and the low earnings threshold, which used to attract a 40% accrual rate, was replaced with a weekly pension accrual amount of 1.70 for each year of S2P membership, from April 2012. This flat amount is index-linked to earnings and rose to 1.80 for 2015/16. If you are a man born before 6 April 1951, or a women born before 6 April 1953, until 1 April 2017 you may be able to top up your S2P benefits by up to 25 a week by making one-off Class 3A National Insurance Contributions. For example, at the age of 65 the cost of each extra 1 a week pension would be 890. Contracting out The Pensions Act 2007 contained provisions to end the option of contracting out of S2P through personal pensions or money purchase occupational schemes (COMPS), which took effect from 6 April 2012. The option of contracting out for defined benefit (final salary) pension schemes will remain until April 2016. In any event, a combination of shrinking contracting out rebates and the closure of schemes to existing members means that active private sector contracted out members are rapidly disappearing. How we can help Advice on pension planning almost always has to take account of proposed changes the pensions world rarely stands still. As financial advisers, we can provide advice on: The impact on your retirement planning of the state pension reforms to date. All Rights Reserved Page 3 of 4
Any fresh government proposals to make further changes to state pensions. How best to integrate your retirement planning with state pension benefits. Whether Class 3A contributions make sense for you. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances. This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. This publication represents our understanding of law and HM Revenue & Customs practice as at 19 December 2015. All Rights Reserved Page 4 of 4
Thank you for your interest in this Essential Guide. For further information or if you would like to discuss any aspect of the guide, please contact us. Alliotts Imperial House 15-17 Kingsway London, WC2B 6UN Tel: 020 7240 9971 Fax: 020 7240 9692 Email: london@alliotts.com Alliotts are registered to carry on audit work in the UK and regulated for a range of investment business activities; and licensed to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England and Wales. All Rights Reserved