Policy paper

2010 to 2015 government policy: State Pension simplification

Updated 8 May 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

This is a copy of a document that stated a policy of the 2010 to 2015 Conservative and Liberal Democrat coalition government. The previous URL of this page was https://www.gov.uk/government/policies/making-the-state-pension-simpler-and-fairer Current policies can be found at the GOV.UK policies list.

Read about our policy here or go straight to the single-tier pension policy papers.

Issue

The government wants to improve the State Pension system because:

• millions of people don’t save enough to provide the income they are likely to want or expect in retirement
• the current system’s complexity makes it difficult for people to make informed decisions about whether, when and how much to save
• inequalities in the system affect some groups, in particular those with broken work histories and those who are self-employed

The government has other pension reform policies including:

• changing the way people save through workplace pensions to encourage many more people to save for their retirement (automatic enrolment)
• improving workplace pensions by raising standards and clarifying outcomes so people can save more with confidence
• reviewing the State Pension age to make sure the State Pension is affordable in the long term and fair between generations

Actions

The government wants to reform the State Pension system by:

• introducing a simple, single-tier pension to help people understand what they need to save for their retirement
• removing outdated and complex elements of the current State Pension system

Background

Pensioner incomes currently represent a very complex aggregation of state and private payments, making it difficult for anyone to predict what income they will receive in retirement. Also, a significant decline in occupational pension saving since the 1970s threatens to change the outlook for future generations of pensioners.

The number of people saving in an occupational pension scheme has fallen from a peak of just over 12 million active members in 1967 to 8.2 million in 2011. The government estimates that almost 11 million people in the current workforce face inadequate retirement incomes.

In 2002 an independent Pensions Commission was established to consider the long-term challenges facing the UK pension system. It identified a number of areas for reform, including:

• undersaving for retirement – millions of people were not saving enough to deliver the income they were likely to want or expect in retirement
• complexity – the complexity of the State Pension system stopped people from making informed decisions about whether, when and how much to save
• inequalities in the pension system – concerns that some groups, in particular women, have reduced opportunities to save for a decent income in retirement
• sustainability – to ensure that the system remains fair between the generations and sustainable, the State Pension age should rise to reflect increases in life expectancy

Welfare reform communications toolkit

Our welfare reform communications toolkit helps explain how DWP is changing the welfare system. It covers:

• what we are changing
• why we are making the changes
• when we are making the changes

Who we’ve consulted

The government consults widely with pension industry professionals, pension scheme trustees, representative organisations, regulators and statutory bodies.

On 8 May 2014 we published a consultation on the draft regulations relating to the abolition of defined benefit contracting-out of the additional State Pension for people in occupational pension schemes.

The Work and Pensions Select Committee considered Part 1 of the draft Pensions Bill in a process known as pre-legislative scrutiny. This involved the committee taking evidence from interested organisations and individuals and producing a report about the draft Bill. We published the government’s response to the Select Committee’s report on 10 May 2013.

We consulted on the ‘abolition of contracting out – a statutory override for Protected Persons Regulations’ from 18 January 2013 to 14 March 2013.

We launched a 12-week public consultation on State Pension reform on 4 April 2011 with the publication of ‘A state pension for the 21st century’. We published a summary of the responses in July 2011.

Bills and legislation

The Pensions Act 2014 put into law changes to reform the State Pension system and implement the single-tier pension.

The Pensions Act 2011 put into law changes to State Pension age and other changes affecting state pensions. These include changes to the timetable for equalising men and women’s State Pension age and increasing the State Pension age to 66.

The Pensions Act 2008 started to simplify the State Pension system by consolidating the additional State Pension and removing rules about contracted-out rights.

The Pensions Act 2007 put into law the reforms to the State Pension system set out in the White Paper, ‘Security in retirement: towards a new pension system’, published in May 2006. This included linking annual cost of living increases in basic State Pension to earnings rather than prices and changes to the State Pension age that took effect from 2010.

Impact

Impact assessments for the provisions in the Pensions Act 2014 to reform the State Pension system and implement the single-tier pension are available on the Pensions Act 2014 page.

On 22 July 2014 we published an update to the main analysis of the impact of the single-tier pension reforms. This brings the analysis into line with assumptions used in the Office for Budget Responsibility’s (OBR) Fiscal Sustainability Report published on 10 July 2014.

Appendix 1: introducing a simple, single-tier State Pension

This was a supporting detail page of the main policy document.

The government published ‘The single-tier pension: a simple foundation for saving’ on 14 January 2013. On 18 March 2013 the government announced that the single-tier pension will be brought in on 6 April 2016 and will affect people who reach State Pension age from that date. Current pensioners and those reaching State Pension age before the introduction date will receive their State Pension based on existing rules.

The single-tier pension will replace the State Second Pension, contracting-out and outdated additions, such as the Category D pension and the Age Addition. The Savings Credit element of Pension Credit will also close to pensioners who reach State Pension age after the introduction of the single-tier pension.

The new pension will make it easier for people to understand what they need to save for their retirement. It will also support the introduction of automatic enrolment into workplace pensions which we introduced in October 2012.

Above the basic level of means-tested support

The single-tier pension will be set above the basic level of means-tested support (the Pension Credit Standard Minimum Guarantee, £148.35 a week for a single pensioner in the financial year 2014 to 2015). The current legislative requirement to increase the basic State Pension at least in line with average growth in earnings will also apply to the single-tier pension. This means that it will stay above the level of means-tested support over the long term.

State Second Pension

Closing the State Second Pension is an important part of the single-tier reforms. Contracting out of the State Second Pension for Defined Benefit schemes will therefore come to an end. Contracting out means giving up entitlement to the State Second Pension in return for a broadly similar occupational pension and a lower National Insurance (NI) rate for employer and employee.

Under the single-tier proposals, all employees will pay the same rate of National Insurance and become entitled to State Pension in the same way. The State Pension system will be significantly simpler as a result.

Qualifying years

The single-tier pension will require 35 qualifying years of National Insurance contributions (NICs) or credits for the full amount. There will also be a minimum qualifying period of between 7 and 10 qualifying years.

Those with less than 35 qualifying years but more than the minimum qualifying period will receive a proportionally smaller single-tier amount.

We will put in place transitional arrangements to recognise people’s National Insurance contribution records before the implementation date.

Inheritance and deferral

The new pension will be based on individual qualification, without the facility to inherit or derive entitlement to the State Pension from the National Insurance record of a spouse or civil partner (although there will be some limited transitional arrangements). It will continue to allow people to defer (put off) claiming their State Pension and receive a higher weekly State Pension in return.

The deferral rate will be finalised closer to implementation. It will no longer be possible to receive deferred State Pension as a lump-sum payment.

State Pension age

‘The single-tier pension: a simple foundation for saving’ also includes proposals for a regular and structured mechanism with which to consider changes to the State Pension age in the future.

Supporting documents

We’ve published a number of supporting documents with further detail on particular elements of the single-tier pension.