Clive Weir, a director with Albert Goodman Chartered Financial Planners, summarises the recently announced changes planned for state pensions and indicates their implications for family lawyers.
The Department of Work and Pensions has published a draft Bill on pension reform together with an impact assessment: ‘The single-tier pension: a simple foundation for saving’.
A flat rate pension of £144 per week will replace the current 3 tier system of the basic state pension, the additional state pension and the graduated pension. However the changes will only affect retirees on or after 6 April 2017.
There will be winners and losers as a result of these changes. The self employed will be big winners whereas unfortunately ex-spouses may be amongst the losers.
I have summarised below the main issues.
Minimum Number of Contributions
Whereas under the current system there is no minimum number of years to qualify for a state pension the new system will require a minimum of 7 – 10 years to start to qualify for a single tier pension.
Issues for family lawyers
Some spouses who do not reach state pension age before 6 April 2017 and do not have a sufficient NI contribution history may not qualify for a single tier pension.
Maximum Number of Contributions
To qualify for the full single tier pension of £144 per week it will be necessary to have paid qualifying National Insurance contributions over a period of 35 years rather than the current 30 years.
There will be a reduction in completed years to account for contracting out. The details of how this reduction will apply are awaited.
Issues for family lawyers
Some spouses may only qualify for a proportionate single tier pension.
Some higher earners or older people may have had a higher expectation from the current system. These higher expected benefits may have been factored into a pensions report.
Duxbury tables assume that currently a full state pension is payable. This may result in the capital settlement being insufficient to support the required income levels.
State Pension Age
The state pension will be equalised for men and women at age 65 by November 2018.
It will then be increased to age 66 by October 2020.
For those born between 6 April 1960 and 5 March 1961 the state pension will increase steadily to age 67. For those born on or after 6 March 1961 it will be 67.
State pension age will then reviewed every 5 years and it is expected it will increase in line with life expectancy
Issues for family lawyers
With the state pension not being paid until a later date, maintenance agreements may need to be revisited.
With public sector pension schemes moving their normal retirement ages in line with the state pensions age, then pension credits might become payable a lot later than expected.
Substitution of Records on Divorce
Currently it is possible to substitute the National Insurance records of either a deceased or former spouse if they had a better National Insurance record. This will not be available for people reaching state pension age after 6 April 2017.
Issues for family lawyers
Previous pension reports may have anticipated that state pensions would be dealt with by substitution of national insurance records. This would not seem not possible leaving one party (usually the wife) with a lower pension income on retirement.
Pension Sharing Orders
At present the additional state pension can be subject to a pension sharing order. This will not be available after 6 April 2017.
Issues for family lawyers
Existing pension sharing orders will be honoured but it is not clear if this will be fully in addition to the persons state single tier pension or as a protected amount at 6 April 2017 but with no ability for additional accrual. This is something we are seeking clarification on.
Means Tested Benefits
The savings element of the pension credit will cease with the introduction of the single tier state pension.
The Minimum Income Guarantee however will stay as a safety net.
Inflation proofing
The current triple lock guarantee system of increases of the greater of CPI, earnings or 2.5% will probably still apply.
Transitional Protection
If at 6 April 2017 an individual has accrued under the current system a higher level of benefit than the single tier state pension then they will keep this entitlement, known as the protected payment. This excess benefit will only be unrated by CPI and not the triple lock guarantee.
State Pension Deferral
At present it is possible to defer receiving a state pension with the option to take the deferred amount either as additional income or as a lump sum. From 6 April 2017 the like sum option will be withdrawn.
ARE YOU READY FOR THE 2012 CHANGES TO WORKPLACE PENSION SCHEMES? For information on how changes to Workplace Pension Schemes effective from 2012 will affect you and/or your business click here.
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