Pensions reform unveiled in Queen's Speech
A flat-rate state pension will be introduced in April 2016 while a new retirement age of 67 will be brought forward, the government has announced.
Speaking at the state opening of parliament yesterday, the Queen introduced the Pensions Bill by saying: "My government will bring forward legislation to create a simpler state pension system that encourages saving and provides more help to those who have spent years caring for children."
The state pension will replace the basic state pension and earnings-related top-up and will be worth around £144 a week in today's money. The basic state pension is currently worth £110 a week.
The bill also brings forward the increase in the retirement age to 67 by eight years, so it will now come into force between 2026 and 2028.
The government will review the retirement age regularly in light of any changes to life expectancy.
The bill applies to England, Scotland and Wales.
Many experts hailed the introduction of a simpler state pension as good news.
John Cridland, director-general of the Confederation of British Industry, says: "The current state pension is confusing and complex. Moving to a flat rate will give people real clarity about how much retirement income they will get from the state and how much they need to save privately through auto-enrolment schemes."
Chris Masley, financial planning expert at Duncan Lawrie Private Bank, calls the new legislation a "landmark moment in the history of the state pension system".
He adds: "Essentially it does exactly what it says on the tin, simplifying the system and removing the complicated means-tested element to encourage people to save."
Dr Ros Altmann, a pensions expert, explains some of the detail in how the state pension will change. "Currently, there is a basic state pension and then various extra earnings-related state pensions (graduated pension, state earnings related pension or Serps, and state second pension or S2P). All these parts will be joined together for future generations into one flat-rate state pension that will be paid to anyone with a 35-year National Insurance record. It is important to note that those who have more than £144 a week from their past rights will not be cut back to that level, they will keep their extra past rights," she says.
The Queen's Speech also introduced a cap on the cost of social care, which will apply to England only.
A bill limiting the cost of care to disabled and elderly people to £72,000 will form part of the government's legislative programme for the next year and come into effect in April 2016.
Michelle Mitchell, charity director general at Age UK, comments on the bill: "The legislation has the potential to transform our crumbling, unfair social care system for current and future generations of older people but to have any chance in succeeding we need to see the legislation twinned with a commitment in the spending review for increased spending on social care."
For more information on the social care cap, click here
This feature was written for our sister website Money Observer
State Earnings Related Pension
SERPS was the name of the government’s additional pension scheme that lasted until April 2002 and it is now called the State Second Pension (SP2). Anyone earning more than over £75 a week and had not “contracted out” would have been building up an additional pension under SERPs. If you started a personal pension plan, you “contracted out” of SERPs and the government paid part of your National Insurance contributions into the plan once a year in the form of a rebate. However, as SERPs was directly related to earnings, the amount people will get when they retire will vary.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Confederation of British Industry
The CBI promotes the interests of its members, some 200,000 British businesses, a figure that includes 80% of FTSE 100 companies and around 50% of FTSE 350 companies. Formed in 1965, it’s the lobbying organisation for UK business on national and international issues and seeks to influence the UK government to help businesses compete effectively.