State pensions turn 100
The Old Age Pensions Act was brought in by the New Liberals in 1908, part of a wider series of reforms to tackle poverty, old age and unemployment.
Before the act was introduced, the elderly were forced to claim on poor relief which often meant entering the dreaded workhouse, carrying out degrading tasks such as rope picking or rock breaking for food and shelter.
A landmark act, pensions finally removed the stigma of claiming for poor relief, and paid up to five shillings a week to those eligible (around £20 a week in today’s money), with the first payments being made to around 500,000 people on 1 January 1909.
However, there were restrictions. Those who claimed had to agree to be means tested - they had to be over 70 (only 5% of the population reached this age), a British citizen and of good character - they had to be sober, have a solid employment history and had not been to prison in the previous 10 years. To make sure they were complying with the strict rules, they were often checked up on by pensions officers who visited their homes unannounced.
But despite the limitations, the introduction of old age pensions was the first step by the British government in accepting that poverty caused by old age was through no fault of their own. Some 20 years later in 1928 the state pension age was reduced to 65 for all workers earning up to £250 a year. The pension was 50p a week and remained that way for a further 20 years.
It wasn’t until the introduction of the National Insurance Act in 1946 that finally introduced a contributory state pension for everyone, provided they paid in national insurance contributions. Available from 1 January 1948, it lowered the pension age to 60 for women and paid £1.30 a week for a single person and £2.10 for a married couple.
Starting the break-up
The 1975 Social Security Pensions Act set up the State Earnings related Pension Scheme (Serps), which replaced graduated pensions with pensions linked to earnings. Workers could choose to contract out, so if they had adequate private pension provision they could pay lower National Insurance contributions.
"This was a positive development at the time, as in theory the more you earn the more pension you would acquire in old age," says Tom McPhail, head of pensions research at Hargreaves Lansdown. "But the idea was unsustainable from a demographic point of view, as it was clear from the start the pension system would soon run into problems."
This link between state pension increases and average earnings was finally broken by Margaret Thatcher in 1980. "However the next two decades saw the slow dismantling of what was a pretty good state pension system," says McPhail. "The basic state pension began to slowly erode in value by 20%."
McPhail believes that the new Labour government managed to stop some of the rot with the introduction of stakeholder pensions in 2001. Aimed at people on low to average earnings it was a low-cost pension scheme which allowed people to invest up to £2,808 a year while receiving tax relief.
In 2003 the second state pension scheme was brought in as a replacement for Serps, closely followed by the introduction of the pension credit, a means-tested benefit designed to top up the incomes and savings of Britain's poorest pensioners. "The combination of stakeholder pensions, second state pensions and pensions credit means that what we have ended up with is a propostorously complicated basic state pension system that many people do not understand."
What next for the basic state pension?
There are approximately 12 million pensioners in the UK today, with the full single pension pegged at £90.70 per week. As over 10% of the population is over 70 and expected to rise, it’s a simple fact that more people are living longer. Indeed anyone reaching their state retirement age is expected by the government to live another 24 years, compared to just nine more back in 1908, so can the current system last?
Not so, according to McPhail. "We fundamentally need a simple and coherent basic state pension linked to earnings, but despite the popularity it would achieve the problem is the government is dragging its heels as it is too expensive."
The basic state pension was introduced as a way to tackle poverty in old age, but with the cost of living increasing and the population getting older by the day, it won’t be until the basic state pension is restructured that today’s pensioners can finally escape the poverty trap.
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.