pensions reform - what it could mean for you
Keep track of pensions reform
The information contained on the Pensions Doctor website is based on the current pension rules and plans. But the Government has proposed major reforms to the pension system which will be introduced over the years so it’s important that you keep track of what’s going on as your future pension entitlement might be affected by the changes introduced through future legislation. There is more information about the pension reform proposals on the DWP website at: www.dwp.gov.uk/pensionsreform
In December 2002 the Government set up the independent Pensions Commission to review the longer-term challenges faced by the pensions system. The Pensions Commission published its conclusions in November 2005, setting out its proposals for meeting the challenges the UK faces in providing a decent and fair retirement income for all in retirement. Following the Pensions Commission report, in May 2006, the Government published the White Paper, ‘Security in retirement: towards a new pensions system’ which set out a number of major reforms to all parts of the UK’s pensions system.
The proposed reforms include: a system of ‘auto-enrolment*’; introducing personal accounts; a new system of credits to increase the number of people entitled to a state pension; linking the increase in the basic state pension* to earnings; gradually increasing the state pension age* from 65 to 68 by 2046; and abolishing contracting out* for defined contribution occupational pension* schemes and personal pensions.
In November 2006 the Government published the Pensions Bill which legislates for the proposals. This was followed in December 2006 by another White Paper, ‘Personal Accounts: a new way to save’ which set out detailed proposals for the new national system of low-cost personal accounts. These reforms will be put into law by the Pensions Act 2007.
The Government is proposing to introduce a new system of ‘auto-enrolment’ from 2012. This means that all eligible employees will be automatically enrolled into one of the new personal accounts or an employer-sponsored scheme – although you can opt out.
The total minimum contribution will be 8% of salary within the Personal Accounts Earnings Band (PAEB) which is currently equal to £5,035 and £33,540 a year. Employees will be expected to contribute 4%, employers 3%, with the government providing an extra 1%.
You will be able to contribute to your personal account during periods when you’re not in paid work.
Self-employed people will be able to save in personal accounts although this will be on a voluntary basis.
Personal accounts and the National Pensions Savings Scheme (NPSS)
The Government is also proposing to introduce a new scheme of low-cost personal accounts saving scheme for people who may not have access to a decent occupational pension scheme. This is based on the proposal for a National Pension Savings Scheme (NPSS) set out by the Pensions Commission. It is hope that over time the new personal accounts will run on annual management charges of around 0.3% a year which is significantly cheaper than personal pensions offered by the insurance industry. This means that more of your contributions go to providing a pension rather than being lost in high charges. People will be offered a limited number of investment options to choose from as research found that too many choices simply put people off and was more expensive to run.
Entitlement to state pension
The Government’s also wants to address the gaps in state pension coverage for people with interrupted careers or with caring responsibilities. The new system of credits will increase the number of people who would become entitled to a state pension. The proposals mean more women in particular will be eligible for a full basic state pension. The proposals include:
- reducing the number of years needed to qualify for a full basic State Pension to 30 years (currently women need 39 years and men need 44 years);
- making it easier for parents and carers to build entitlement;
- simplifying the scheme so that all contributions – paid or credited – count.
The Government proposes to implement these changes for people who reach state pension age from 6 April 2010 – that is men born on or after 6 April 1945 and women born on or after 6 April 1950. If you’d like more information on the proposed changes, the DWP has produced a factsheet, which you can download here.
The Government also plans to make a number of changes to state pensions. It plans to restore the link between the basic state pension and earnings – the aim is to do this by 2012 although the precise date has yet to be announced.
The state second pension (S2P*) will be reformed so that it becomes a simple, flat-rate weekly top-up to the basic state pension. The change will happen gradually and the Government estimates that the S2P will become completely flat rate around 2030 or shortly afterwards.
State pension age
The other main reform relates to changes to the state pension age. The Government plans to gradually raise the state pension age in line with increases in average life expectancy.
State pension age for women is already due to rise from 60 to 65 between 2010 and 2020 to bring it into line with men’s state pension age.
State pension age will then subsequently rise for men and women. This will begin with a rise from 65 to 66 over a two year period from 2024 with further one year rises so that by 2046 state pension age will be 68 for both men and women.