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UK Proposes New Single-Tier State Pension

In January this year, the Queen’s Speech outlined proposals to overhaul the current UK state pension system in the Pensions Bill 2013-14 (the “Bill”).

While this will only affect people who reach state pension age after April 2016, the proposals will create both winners and losers. The winners generally include the self-employed (who currently only qualify for a basic state pension) and women (who may have gaps in their National Insurance contributions from caring for children or relatives). However, for some people, like public sector workers in contracted out final salary schemes, they will see their National Insurance contributions rise in the future. Key proposals included in the Bill are:

  • New Single-Tier Pension

In order to address what is currently seen as a very complex state pension system, the Government is proposing a new single tier, flat rate, pension that will replace the basic and additional pensions (earnings related top-ups e.g. state second pension) for people reaching state pension age from 6 April 2016 onwards. The single-tier pension will consist of one payment of around £144 a week in today’s money based on 35 years (an increase from the current 30 years) of National Insurance contributions or credits. To qualify for the new state pension people would need a minimum of between 7 and 10 years contributions. People with contributions of between 10-34 years would receive a proportionally smaller pension. While in the future everyone with at least 35 years of contributions would receive the £144, it will take a number of years to reach this stage. During the transitional period, some people will receive a state pension higher than £144 and some will receive less. This is as a result of contributions already built up before the single-tier pension was introduced.

  • End of Married Couple’s Pension

In recognition of the fact that one spouse in a family may not have worked, the UK allows someone who is married or in a civil partnership who has not paid their own National Insurance contributions to receive a married couple’s pension based not on their working life, but on the contributions record of their partner. This is currently worth up to £66 a week and is paid for the person’s entire retirement. Where both partners have earned enough to claim a larger state pension, this is paid instead of the married couple’s pension.
This form of pension is currently claimed by 1.7 million people of whom 220,000 are living overseas. However, this will no longer be available under the Bill as the single-tier pension will be based on individual qualification.

  • Increase to State Pension Age

The state pension age will rise to age 67 between April 2026 and April 2028 with provision for 5 yearly reviews of state pension age in light of rising life expectancy.The Bill was introduced to Parliament on 9 May 2013 and is expected to enter into force in spring 2014.

If you have any questions regarding your eligibility for UK National Insurance, we would recommend that you contact the UK’s International Pension Centre. Contact details and other information can be found at GOV.UK.

Photo Credit: “Pension” is copyright (c) 2014 Simon Cunningham and made available under CC BY 2.0