Should you boost your state pension?
Women will soon be able to boost their pension pots as a result of proposed changes to the Pensions Bill currently going through Parliament. However, campaign groups insist more needs to be done to guarantee them a comfortable retirement.
The government has proposed an amendment to pension legislation that will enable women aged between 53 and 60 to pay a further six years of national insurance contributions into their basic state pension. It is estimated this will give them an extra £18 a week from 2010. Currently, people can only make up six years of NI contributions but, under the planned changes, those retiring between April 2008 and 2015 will be entitled to buy a total of 12 years’ worth.
James Purnell, the secretary of state for work and pensions, unveiled the changes following concerns about the disadvantages faced by those with shorter work histories – women, for example, who have taken time out of work to raise a family or care for elderly or disabled relatives. “This [proposal] is fair, affordable and straightforward and will give more people the chance of a more secure future in retirement,” Purnell said.
“Since 1997, we’ve reduced absolute pensioner poverty by 1.9 million, and our radical reforms of the state pension have made it fairer, more generous and more widely available.”
Just 35% of women currently qualify for a full basic state pension. With the changes, however, the government estimates that, by 2010, about 75% will be entitled to a full basic state pension, rising to more than 90% by 2025.
The measures are part of a programme of reforms that will see the state pension system offer a fairer deal to everyone. Others include reducing the number of qualifying years for a full basic state pension to 30 for men and women (see full list below).
Gordon Lishman, director general of Age Concern, said the announcement represented a victory for a generation of women that had been ignored by previous pension reforms. He added that Gordon Brown was honouring his recent pledge to give women a fairer pensions deal.
“We’re delighted that thousands of older women will be given the opportunity to build up a better state pension,” he said. “For too long they have been dealt a poor pensions hand, simply for choosing to stay at home and care for their family.”
Rachel Vahey, head of pensions development at AEGON, added that it was “heartening” to see the government had listened to the industry and was willing to make changes to pensions that reflect the way people live their lives today.
“This change will greatly help a significant number of stay-at-home mothers and carers who, due to their inconsistent working patterns, have not been able to build up a full basic state pension,” she said. “If the amendment goes ahead, they will be able to take steps to increase their basic state pension retirement income.”
But not everyone is so impressed. The National Pensioners Convention has dismissed the government’s announcement that people will be able to buy back up to six years of missing NI contributions as “window dressing”.
Dot Gibson, the vice-president of the NPC, claimed that up to five million women pensioners failed to get a full state pension because of time spent raising children, caring for relatives or working part-time and, despite the changes, many would not be able to buy back these lost years.
“Many are living below the poverty line,” she said. “Up to a million older women may not even be alive by 2010 when the government intends to make the change.” In addition, an extra year’s pension would only provide a measly £2.35 a week more than the state pension.
“The real indictment is that even a full state pension is only £90.70 a week – more than £60 below the official poverty line and among the lowest in Europe,” Gibson added. “Women’s pensions are a national disgrace. No amount of window dressing will mask the fact that the basic state pension must be raised across the board for all pensions to help them avoid poverty in retirement.”
Dr Ros Altmann, an independent policy adviser, agreed. She insisted the announcement was “more spin than substance” and pointed out that the details in the small print meant one had to be careful about how it was interpreted. “These measures are a further rearrangement of the deckchairs on our sinking state pension ship,” she said. “They will make some people better off but won’t solve the problem that our system is far too complicated.”
There are plenty of unfair elements associated with the qualification criteria, Altmann believes, which make it impossible for people to understand. “It’s not fit for purpose and we need a radical rethink of how we support our elderly population,” she said.
At the moment, the government charges around £420 for each year of contributions that is bought, so someone needing an extra 10 years’ worth would need to pay out more than £4,000, giving them an extra £23 a week income. However, from April 2009 this cost will increase to £626.
Only people who already have 20 years of NI contributions will be able to buy back those extra years, while anyone who retired before April 2008 will not be able to purchase anything at all, so the changes will not benefit all women.
“Politicians would rather tweak our existing system than design one that is fit for the 21st century,” Altmann added. “A flat-rate citizens’ pension for everyone over a particular age would finally sort out our problems. When will we get it?”
One of the problems is that many women who are already retired – or are approaching that age – were offered the chance to pay the married women’s stamp between 1948 and 1977, which was a reduced rate of NI.
Unfortunately, the years in which the stamp was paid do not qualify towards a woman’s own pension. Instead, they get a pension that is worth 60% of their husband’s state pension. By any standards, this is a low amount.
Other women are also affected. It’s estimated there are millions in poorly paid jobs who are not earning enough to make them eligible for a decent pension, but who simply do not realise this is the case until it’s too late to do much about it.
To do or not to do?
So should you take advantage of the changes that are being planned? Not necessarily, according to Altmann. A final decision on whether or not it’s worthwhile will depend on your personal circumstances.
There are plenty of risks associated with buying back missing years of NI. For example, it’s not worth anyone who might qualify for the means-tested pension credit buying back the missing years. “People would probably be wise to wait until just before retirement before making their decision, because then they’ll be in a better position to judge whether this is the right thing to do,” Altmann added.
The plans outlined by the government have also turned the spotlight back onto the world of long-term savings and, in particular, the attitudes of people towards putting money away for their retirement. For example, a study by financial services company The Hartford, conducted in conjunction with YouGov, revealed that more than half of women aged between 45 and 54 harboured significant concerns that they would run out of money in retirement.
And the credit crunch is creating a new hurdle for those who may have been hoping to top up their pension pots, with 61% of this age group thinking more about their day-to-day finances than their retirement plans.
Michael Rudge, UK managing director at Hartford Life, believes you should seek the help of an independent financial adviser. “While the research shows that women are more worried than men about some aspects of retirement, their worries are not unfounded,” he said. “Women are paying more attention to saving than ever before. But they often have so many pressures on both their time and money that they can find it hard to plan for retirement.”
Other major changes to the pension system
• The number of qualifying years for a full basic state pension will reduce to 30 for men and women. It is currently 39 for women and 44 for men.
• New weekly national insurance credits are expected to be introduced which will recognise caring for children or disabled people in the same way as paid work.
• From 2012 auto-enrolment will be introduced to ensure equality of opportunity for male and female employees to build up a private pension.
• Personal accounts, also to be introduced in 2012, will set a minimum employer contribution of 5%, benefiting an estimated half a million women.
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.