TPAS - The Pensions Advisory Service

Pensions Act 2007

In May 2006, the Government issued a White Paper, summarising proposals for improved security in retirement for this, and future, generations.  This paper was released in response to a report published in 2005 by the Pensions Commission, headed by Lord Turner.

In November 2006, following consultation on the White Paper, the Government published the Pensions Bill.  The Pensions Bill laid out the framework for the legislative changes required to implement the White Paper proposals, as accepted by the Government.

In July 2007, the resulting Pensions Act 2007 received royal assent, paving the way for the changes to be implemented.

The following is a summary of the changes included in the Pensions Act 2007. Effective dates for the changes are, where known, included in the summaries.

Qualifying conditions for the Basic State Pension (BSP)

Currently, to qualify for the full BSP, a man needs 44 qualifying years and a woman needs 39.

For those reaching State Pension Age (SPA) on or after 6 April 2010, the number of qualifying years needed to qualify for a full BSP will be reduced to 30 for both men and women.  A person with less than 30 qualifying years will be entitled to a proportion of the full BSP for each qualifying year they have built up.

Claiming a Category B pension

A Category B pension is paid by virtue of a spouse’s or civil partners qualifying years and earnings.  Currently, on reaching their SPA, a person cannot claim a Category B pension until their spouse has claimed their own pension.

This restriction will be removed with effect from 6 April 2010.  As a result, where one member of a married couple or civil partnership has deferred his or her pension and the other member has reached pension age, the other member will be able to claim their Category B pension.

Home Responsibilities Protection (HRP) entitlement

HRP will be abolished from 6 April 2010.

For those reaching SPA on or after 6 April 2010, each complete year (up to a maximum of 22) of HRP awarded under the existing rules will be converted into a qualifying year for the BSP and relevant bereavement benefits.

Uprating of the State Pension

In 2012, but in any event at the latest by the end of the next Parliament, the state pension will be uprated annually in line with earnings rather than prices.

Eligibility for the State Second Pension (S2P)

S2P provides an additional state pension for:

• those with earnings between the lower and upper earnings thresholds; and
• qualifying carers and low earners who, for the purposes of calculating the benefit, are deemed to be earning at the lower earnings threshold.

There will be an increase to the number of people deemed to be earning at the lower earnings threshold, and so accruing the S2P.  This is an interim change until the proposed new simplified S2P is introduced.

People will be deemed to be earning at the lower earnings threshold for a tax year starting with that commencing 6 April 2010, if they satisfy any of following conditions:

• the person has earnings equal to or greater than the qualifying earnings factor for the year but less than the low earning threshold;
• the person has earnings less than the qualifying earnings factor but is entitled to enough new earnings factor credits to bring his earnings factor up to the qualifying earnings factor;
• a person has no earnings but is entitled to 52 of the new credits for the year.

Restructure of S2P

S2P will be restructured.

Currently, people earning, or treated as earning, between the lower earnings limit and the upper earnings limit accrue S2P on a cumulative basis depending on the level of their earnings. Earnings above the upper earnings limit do not accrue S2P. The table below sets out the current earnings accrual bands for S2P.

The first step will be to merge Bands 2 and 3, so that all earnings exceeding the low earnings threshold (but not exceeding the upper earnings limit) will fall into Band 2 and accrue additional pension at a rate of 10%. This change will have effect for the tax years 2010/11 onwards.

In addition, from a date to be determined by the Government, the current 40% accrual band (Band 1) for earnings between the lower earnings limit and the low earnings threshold will be replaced with a weekly flat rate accrual amount of £1.40 (giving an equivalent annual amount of £72.80). This will be accrued by all contributors and people credited into S2P in respect of each year of contribution. For a time, the additional earnings-related component of state second pension (accruing at 10%) will remain in place. This component will ultimately be withdrawn by around 2030, leaving a flat-rate benefit.

Increase to the State Pension Age (SPA)

The SPA will increase by one year per decade between 2020 and 2050, with each change phased in over two consecutive years in each decade.  Those born before 6 April 1959 will not be affected by this change.

Conversion of Guaranteed Minimum Pensions (GMPs)

Trustees of occupational pension schemes will be able to convert members' GMP benefits into ordinary scheme benefits, calculated under the scheme's own rules.  This will be subject to certain safeguards to protect the members' interests. Each member's post conversion benefit would be required to be at least as actuarially valuable as their rights immediately prior to conversion. Effective date of this change is unknown.

Abolition of contracting out for defined contribution schemes

Contracting out for money purchase occupational schemes and personal pension schemes (including stakeholder pensions) will be abolished. Contracting-out certificates for these schemes will be automatically cancelled. The result will be that from the date of cancellation, members of money purchase schemes will be automatically contracted back into the S2P. This is likely to become effective from April 2012.

Dispute resolution arrangements for occupational pension schemes

Trustees of occupational pension scheme must have in place a two-stage dispute procedure, known as the Internal Dispute Resolution Procedure (IDRP).

It will be possible to replace the two-stage procedure with a single stage arrangement where all decisions would be taken by the trustees or managers. This would not be compulsory, however, and schemes will be able to retain the present two-stage arrangements if they wish. This is likely to be effective from April 2008.

Personal Accounts

A body called the Personal Accounts Delivery Authority is to be set up to undertake the preliminary work necessary for the establishment of a personal accounts scheme in April 2012.

The Authority is being established with a remit limited to:

• Provide advice and recommendations to Government, helping it to think through the operational and commercial implications of its policy options.
• Formulate a commercial strategy for the personal accounts scheme by preparing specific products which comprise a financial, technical and commercial strategy prior to issuing an Invitation to Negotiate.

The Authority will be at a distance from Government and will be able to manage its own affairs.

What is a Personal Account?

Personal Accounts will provide a straightforward opportunity to contribute to a high-quality, low-cost savings vehicle. The scheme will have the following key features:

• Employees will contribute 4 per cent of a band of earnings of between around £5,000 a year and £33,000 a year.
• Employers will make minimum matching contributions of 3 per cent on the same band of earnings.
• A further 1 per cent will be contributed in the form of normal tax relief.
• There will be support for all employers during the introduction of compulsory employer contributions:
• their contributions will be phased in over a three-year period, at the rate of 1 per cent each year;
• the contribution rate will be set out in primary legislation to create stability;
• the priority is to design the scheme and the transition phase so that burdens on employers are minimised; and
• the Government will consult on transitional support for the smallest businesses and whether a longer phasing period is needed.
• Automatic enrolment for employees into either the new personal accounts scheme or their own employer's occupational scheme providing it meets a minimum standard:
• Employees will be able to opt out of this provision, in which case the employer would not contribute;
• Non-employees, including the self-employed and non-workers, will be able to opt into the scheme.

The new system of personal accounts with automatic enrolment will provide a simple and straightforward way for people to take personal responsibility for the income they want in retirement.

Click here for further information about Personal Accounts.