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Which way for the state pension?

Which way for the state pension?

The state pension system is the subject of some radical reforms, with the current two-tier state pension being replaced with a new single-tier pension that is higher than the current basic state pension. One of the aims is to eliminate the need for means-tested pension credit.

Current system

The current state pension system is made up of two elements.

The basic state pension (BSP) is normally paid from the date when you reach state pension age (SPA), which varies according to your sex and date of birth. You currently need 30 qualifying years’ worth of national insurance contributions (NICs) in order to qualify for the full BSP, which for 2013/14 is set at £110.15 a week for a single person. You can defer the start date to receive a higher pension or a taxable lump sum.

The state second pension (S2P) is related to your actual or deemed earnings and provides a top-up to the BSP. S2P was the successor of the state earnings related pension scheme (SERPS). Self-employed people do not qualify for S2P, and in the past many employees have been contracted out of S2P/SERPS through their membership of various occupational or personal pension schemes.

New system

The single-tier pension will be introduced from 6 April 2016 – one year earlier than originally announced. You will receive it if you reach your SPA on or after the start date. However, if you reach your SPA before then, your pension will be paid under the existing rules and you will continue to receive the BSP and, if you qualify, S2P/SERPS as well.

The amount of the single-tier state pension will be decided shortly before it is introduced and it will be set above the level for meanstested support (£145.40 a week in 2013/14). To qualify for the full single-tier state pension you will need 35 qualifying years’ worth of NICs. It will still be possible to defer starting to receive the new single-tier pension, but you will only be able to earn extra pension, not a lump sum.

Moving to the new system

If you will reach your SPA after the start of the single-tier pension, your national insurance records under the old system will be translated into a simple single-tier starting amount, known as ‘the foundation amount.’

If you have a foundation amount less than the full level of the single-tier pension, you will be able to build up entitlement to the full level. If your foundation amount is more, you will receive the foundation amount, inflation adjusted, but not accrue any further state pension under the new system.

End of contracting out. The abolition of the S2P will bring an end to contracting out. If you are a member of a contracted-out salary-related occupational pension scheme, you will pay the full NICs rate once the single-tier pension is introduced.

This article originally appeared in the Summer edition of Tayler Bradshaw's accountancy newsletter Money Matters. The information represents Tayler Bradshaw's understanding of law and HM Revenue & Customs practice as at May 2013.

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