2. State pensions

The coalition programme

Restoration of the earnings link for the basic state pension from April 2011, with a “triple guarantee” that pensions are raised by the higher of earnings, prices or 2.5%. Not in the programme was a Lib Dem plan for a Citizen’s Pension for all long-term resident UK citizens, set at the level of Pension Credit. Plans were announced for a Pensions and Savings Bill and a National Insurance Contributions Bill.

State pensions reform

Through the 2007 and 2008 Pensions Acts, the previous Labour government set in train reforms designed to make the state pension fairer, more widely available, simpler and more generous “so that a solid foundation is built on which people can save”.

Critics point out that the changes did little for people who reached their state pension age before the changes came into force. The new rules apply to everyone who reached state pension age on or after 6 April 2010, although some reaching state pension age before then may also have been affected. Along with an increase in state pension age the key measures were:

• reducing the number of qualifying years needed to get a full basic state pension;

• removing minimum National Insurance contribution conditions required to obtain a basic state pension;

• introduction of new weekly credits for parents and carers with the abolition of Adult Dependency Increases;

• changing the rules to enable husbands and civil partners (as well as wives) to get a state pension based on a spouse’s or civil partner’s National Insurance contributions;

• changes to age thresholds and qualifying ages for other Pensioner and Working Age benefits (Jobseeker’s Allowance, Winter Fuel Payments, Pension Credit, Employment and Support Allowance and the higher rate allowances in the calculation of Housing and Council Tax Benefit).

• the age at which concessionary travel can be claimed is changing in line with the gradual increase in women’s state pension age (arrangements in Scotland, Wales and Northern Ireland may differ);

• uprating of the basic state pension in line with earnings to be restored;

• increasing the number of people eligible for State Second Pension (S2P) which will also become flat-rated in future; and

• allowing certain people to buy additional voluntary National Insurance Contributions

National Insurance

The state pension is a contributory benefit which depends on an individual’s National Insurance (NI) contributions record (from 16 to state pension age). It also determines rights to other contribution-based state benefits (Jobseeker’s Allowance, Bereavement Allowance and Employment and Support Allowance). The proposed National Insurance Contributions Bill would increase rates by 1% from April 2011 taking the new main rate of Class 1 contributions to 12% while the new Class 1 employer’s rate would be 13.8%. The measure was expected to finance an increase in the income tax personal allowance and an increase in the NICs threshold.

Although the main purpose of National Insurance was to fund pensions and certain other benefits, the National Pensioners’ Convention has accused the main political parties of being willing to spend NI contributions “on everything but decent state pensions”.

Basic state pension

For the tax year 6 April 2010 to 5 April 2011, the full basic state pension is £97.65 per week for a single person, £58.50 for a married woman claiming on the strength of her husband’s NI record (see below) and £156.15 per week for a married couple (where the wife is qualifying on husband’s contributions). However, if both qualify for the full pension the total would be £195.30 a week.

At state pension age individuals can claim and retire, claim and carry on working, or postpone their claim. There is no further requirement to pay NI contributions. Deferred pensions increase by 10.4% for every year of postponement and there is the opportunity to claim a lump sum payment (if deferred for at least a year).

NI contributions record

The number of years of NI contributions needed to qualify for a full basic state pension was cut to 30 from 6 April 2010, down from 44 for a man and 39 for a woman. A qualifying year is a year in which the individual’s earnings have been at least 52 times the Lower Earnings Limit (LEL) of £97.00 per week in 2010-11. Every single qualifying year now gives an entitlement to 1/30th of the full basic state pension.

Individuals are credited with NI contributions during periods when they are receiving Jobseeker’s Allowance, Incapacity Benefit, Employment and Support Allowance, Working Tax Credit, Maternity Allowance, Statutory Sick Pay, Statutory Maternity Pay, Statutory Adoption Pay, Carer’s Allowance or Severe Disablement Allowance, or are on an approved training programme.

Individuals can buy additional contribution years. This is usually limited to gaps in the previous six tax years. However, since 6 April 2009, anyone reaching state pension age between 6 April 2008 and 5 April 2015 who already has at least 20 qualifying years (including years of HRP — see below) may be able to buy back up to an additional six years of contributions, going back to tax year 1975-76.

Women previously had the option of paying the married women’s reduced NI contribution, until it was withdrawn in 1977. Unfortunately, these contributions did not count towards pension entitlement. Women who do not have sufficient NI contributions to qualify for at least 60% of a basic state pension on their own contribution record can claim a lower Category B pension on the basis of their husband’s contributions. Since 6 April 2010 that right is extended to husbands and civil partners; they no longer have to wait for their partner to reach state pension age and claim state pension before claiming themselves.

Increases in the basic state pension — the earnings link

Between 1975 and 1980 the level of the basic state pension was formally linked to the greater of price and average earnings growth. The link was broken by the then-Conservative government and since 1980 the basic state pension has generally increased in line with RPI inflation. As a result it fell in value from 26% of average earnings in 1979 to 15.8% in 2008, and was then worth only £90.70 instead of £149.25 (Institute for Fiscal Studies).

The previous Labour government had agreed to restore the link with earnings in 2012 but the coalition government has brought this forward to 2011, and included underpinning commitments that should prevent it rising by less than at least 2.5% a year in future. The coalition’s pensions minister Steve Webb acknowledged shortly after the election that restoration of the earnings link is not enough in the long-term and referred to simplification of the state pension system, “money as of right”, and “making saving worthwhile” (see below).

Carer’s Credit

Loss of NI contributions due to caring responsibilities could result in lower pensions. Home Responsibilities Protection was introduced to address this. However, from 6 April 2010, a new system of weekly credits counting towards basic state pension and S2P was introduced, replacing HRP while the Adult Dependency Increase is being phased out. Carer’s Credit is available to people caring for children or disabled people and up to 22 years’ HRP will be automatically converted into “credits” for those reaching state pension age on or after 6 April 2010. Weekly National Insurance Credits (Class 3 NICs counting towards basic state pension and S2P) are available for:

• Child Benefit recipients caring for a child or children up to the age of 12 (automatically awarded);

• anyone caring for a total of 20 hours or more each week for someone in receipt of Disability Living Allowance (the middle or highest rate care component); or Attendance Allowance or Constant Attendance Allowance at any rate; or someone certified as needing this care by a Health or Social Care Professional;

• registered Foster Carers;

• those regularly and substantially engaged in caring for a severely disabled person and who receive Income Support, but not Carer’s Allowance; and

• automatically awarded to Income Support Recipients “who are substantially engaged in caring”.

Over-80s pension

People who are over 80 and not entitled to the basic state pension at all, or only up to a proportion of the full rate (up to 60%) can claim a non-contributory Category D pension.

Additional state pension — S2P

In addition to the basic state pension there is an additional or second state pension, currently known as S2P. It is based on the number and level of NI contributions but is in the process of changing from an earnings-related to a flat-rate addition to the basic state pension (it will have some link to earnings until after 2030).

Parents of children under 12 and people caring for one or more severely disabled people for at least 20 hours a week can build up entitlement to S2P through credits. In 2009-10 terms most help from S2P went to people earning between £4,940 and £13,900, building up at around £1.60 a week for each qualifying year.

Employees have the option of “contracting out” of the additional state pension. Contracting out allows members to give up all or part of the benefits of the additional state pension, with money rebated to their occupational or personal pension (where it is covered by “protected rights” determining how the money can be used). The Pensions Act 2007 made some changes to contracting out: Individuals wanting to know whether to contract in or out should seek independent financial advice as the answer may depend on government policy, future market performance and individual circumstances.

Further state pension reform?

The Liberal Democrat manifesto called for a Citizen’s Pension for all long-term resident UK citizens set at the level of Pension Credit (in 2010-11 Guarantee credit is worth £132.60 per week). This did not appear in the coalition government’s programme but the current system has been criticised by pensions minister Steve Webb as being almost “three pensions” in one.

NAPF describes our current provision as “one of the lowest state pensions in the developed world” with almost three in five pensioners (58%) needing some form of income-related benefit. It proposes a Foundation Pension combining the current basic state pension and state second pension (S2P) into a single universal flat rate benefit set at £8,000 a year (equivalent to almost £154.00 a week). NPC wants basic state pension set at the official poverty level, giving a figure of £165.00 a week in 2009, with S2P retained as a good earnings-related pension (an alternative to NEST).

General union Unite’s pensions policy calls for a phased increase in the level of the basic state pension with the initial objective of taking it above the Pensions Credit threshold, reversal of the evolution of the state second pension (S2P) to a flat-rate pension, and further benefits for carers. The GMB general union also calls for a cash injection to the basic state pension to restore its value. And public and commercial services union PCS, which is affiliated to NPC, wants the government to raise the state pension above the poverty level.