The new Pensions Act 2014 was passed in Parliament recently, and the changes it will introduce to the state pension will start to come into effect from April 2016. The changes will affect future pensioners than people already claiming the state pension.
What will change?
The key points of the Act relating to state pensions are:
- Creating a single-tier state pension, which will very gradually replace the existing pension system.
- Moving to an individual entitlement based system (not linked to a spouse).
- Raising the age at which people become eligible for the state pension from 66 to 67, although not effective until April 2026 to April 2028.
Why are changes needed?
The reason for the changes is that the existing pensions system is too complex. The way it is currently set up requires a significant amount of means testing to be undertaken, which is time consuming for the Department of Work and Pensions (DWP) and pensioners alike. There are also inequalities in the system, with many men receiving higher pensions than women.
The new system will be fairer and easier for people to understand. People will be able to plan and budget for retirement more easily, as they will be able to assess approximately what they will receive, and therefore how much they need to save and invest for their retirement years.
Who is affected?
Although the Act has already been passed, the changes will take some time to come into effect, and not everyone will be affected by them. People who are already of pensionable age or who will become so before 6th April 2016 will stay on the current pensions system, and they will not be migrated to the new flat rate system at any point in the future. These people will be eligible to join a new voluntary pension top up scheme by making additional National Insurance contributions. This top up scheme will be launched in October 2015.
Will everyone get the same?
There will be a flat rate of no less than £148.40 for all those who have paid National Insurance contributions while working for a minimum of 35 years. People who have made contributions for between 10-35 years will receive a reduced amount. Anyone who has not made contributions for at least 10 years will not be eligible for the new state pension scheme. The pension will be for the individual, so a person will not usually be able to make a claim on a deceased spouse’s contributions.
Since the changes will not affect people already claiming a state pension, no one will see a change to their own personal circumstances, so the changes should be reasonably straight forward to implement, and the simpler system will be welcomed by those working with it.