TPAS - The Pensions Advisory Service

Pension Reforms: State Pensions

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 affecting State Pensions. 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 replaced by a new system of weekly contribution credits from 6 April 2010 for foster carers, people caring for one or more severely disabled persons for 20 hours a week or more or getting Child Benefit for a child under 12 years of age.

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. Converting years of HRP can also be used for up to half the working life to help satisfy the condition for bereavement benefits.

Uprating of the State Pension

Subject to affordability and the fiscal position in 2012, but in any event at the latest by the end of the next Parliament, the basic state pension will be uprated annually in line with average earnings rather than prices.

Eligibility for the State Second Pension (S2P)

S2P provides an additional state pension for:

• those with earnings at or above the annual National Insurance lower earnings limit (£4,680 in 2008/09); and
• qualifying carers and certain long term sick or disabled people who, for the purposes of calculating the benefit, are deemed to be earning at the low earnings threshold (£13,500 in 2008/09).

Employees with earnings between the annual lower earnings limit and the low earnings threshold are treated as having earnings at the threshold for S2P purposes.

From 6 April 2010 access will be extended to foster parents, people awarded child benefit for a child under age 12; people looking after someone with a qualifying disability for at least 20 hours a week. They will be deemed to be earning at the low earnings threshold, for S2P purposes. Additionally, people will be able to combine earnings with credits for caring and/or incapacity within a single tax year in order to build up S2P entitlement.

Restructure of S2P

The rules for the additional State Pension are changing. In the future it will become a simple, single rate, weekly top-up to the basic State Pension.

For people earning £4,680 or more a year or getting credits for State Second Pension, it will start to build up at a flat rate of around £1.60 a week (both figures in 2008/2009 money) for each qualifying year. The exact date from which this will start has yet to be fixed, but it is expected to be between 2012 and 2015.

The current earnings-related element built up by people earning between £13,500 and £40,040 a year (in 2008/2009) will be gradually withdrawn, so that people will build up entitlement on a completely flat-rate basis by around 2030 or shortly afterwards. These changes to additional State Pension are intended to make it easier for you to understand how your State Pension is worked out and estimate how much you will receive.

Increase to the State Pension Age (SPA)

The SPA will increase by one year per decade between 2024 and 2046, 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.