'We stand to benefit from pension changes': Is the new age of pensions good or bad for you?

Plans for the biggest overhaul in State pensions for a generation will see a single weekly payment replace a complex mix of entitlements and benefits.



The proposals, announced in a White Paper last week, will boost the pensions of the self-employed and low earners.



Those on above-average incomes and younger workers are likely to be the biggest losers. But today’s pensioners will not be included in reforms and will continue to receive their existing pensions.



Better off: Self-employed couple Hermione and Stephen Avila stand to benefit under the pension changes

The plans also throw into doubt the future of final salary pension schemes in the private sector, with employers facing big increases in running costs as a result of knock-on changes.



Financial Mail sets out the key issues in reforms that could affect virtually every person in Britain who is aged 60 or under.



Why the change?

Ministers want to replace a jigsaw of State pensions and benefits with a simpler payment to give workers a clearer idea of what to expect when they retire.



Today’s pensioners can claim a basic State pension worth up to £107.45 a week for a single person if they have 30 years of National Insurance contributions.



Employees can add an extra payment based on their earnings. The State Second Pension and its predecessor, Serps, can add up to £160 a week to the basic pension, though the average paid is just over £20.



Finally, the Government offers a means-tested top-up through the tax system with a pension credit. This guarantees at least £142.70 a week for a pensioner, although an estimated 1.6 million miss out because they do not claim.



What is going to happen?

Those retiring in future will get a single pension worth up to £144 in today’s money.



This will replace the basic pension, Pension Credit and the additional state pensions. The new single-tier pension will increase each year by whichever is the highest of the rise in average earnings, inflation or 2.5 per cent. The Government hopes to bring in the new pension from 2017, though the start date may be later. Workers will need 35 years of NI contributions – or credits, for example for years spent caring for children – to qualify for the full pension.

And those with less than ten years could get nothing at all.



Joanne Segars, chief executive of the National Association of Pension Funds, says: ‘A simpler, more generous State pension is a much-needed shake-up that will ultimately help millions of pensioners and savers. For the first time in a generation, people will know it pays to save and that whatever they put aside won’t be eroded by means-testing when they retire.’



But anyone reaching the State pension age before the new payment is introduced will continue to be paid under the current rules. And they may still need to rely on means-tested benefits.



What else is changing?

The pension you build up will be yours and yours alone. Spouses or partners of anyone retiring under the new rules will not be able to count on their partner’s NI record to get a more generous pension in their own name, or inherit any pension after their partner dies.



And the end of the State Second Pension also means an end to contracting out. This sees workers opting out of the State system, with a company pension scheme matching the income that the State Second Pension would have paid. In return, both staff and employers pay less NI.



When will I be able to claim this pension?

The current plans to increase the State pension age in steps will continue. This will mean women gradually moving to a pension age of 65 in line with men by 2018.



From that date the pension age for both sexes will increase from 65 to 66 by 2020. And it will move from 66 to 67 by 2026. But the Government wants a new system of more regular reviews to adapt the system to longer life spans. The plans call for a review of pension age every five years and could eventually result in the pension age rising to 70 or even beyond.



Who are the winners?

The four million self-employed are among the clear winners. At present, they are not eligible for the State Second Pension.



Stephen Avila, 37, and his wife Hermione, 29, are in line for bigger pensions under the new rules. The couple, who are both self-employed, run a marketing agency. He says: ‘The changes as they are set out would make us both better off, with a bigger flat rate pension. And that does look a valuable increase that puts the self-employed on the same footing as other workers.’



But Stephen and Hermione, who live in Colchester, Essex, with her son Stanley, 6, are not prepared to base their retirement on the new State pension.



Stephen says: ‘It is more than 30 years until I am likely to collect any State pension, so there is time for things to change again.



‘I think everyone should be doing their own private saving and treating anything that they eventually get from the State pension as a bonus.’



Other groups who should gain include low earners, women who spend years out of the workforce as carers, and those with gaps in their NI record because of unemployment. They will get a bigger State pension than they might otherwise have expected.



And the losers?

Chris Curry, research director at the Pensions Policy Institute, says despite the higher headline value for the new pension, the Government’s projections show that the new system will be marginally cheaper overall in the long term.



‘If you are going to be spreading less money among the same number of people, there have to be some losers,’ he says.



The Government’s projections show that just over half of workers are expected to get a lower pension by 2060 than if the current rules were left in place.



The Institute for Fiscal Studies says younger workers in their 20s and 30s are likely to end up worse off. It says that under the current system, workers can earn about £5.05 worth of State pension for each year they work, up to a maximum of 30 years, then £1.46 a year for other years. Under the planned system, each year is worth a pension of £4.11 up to 35 years, with nothing earned in following years.



Another group that is likely to lose out could be above-average earners who would have expected to build up a substantial State Second Pension. Those who have already accrued entitlement to pensions worth more than £144 a week by the time of the switchover will keep these higher pensions. However, the rest will not be able to build up any more than £144 a week.



Is there anything I should do before the rules change?

At present, the advice is to sit tight. Those who have a patchy track record of NI contributions can volunteer to pay extra years to help boost their pension entitlement, but if you are due to retire after April 2017, this might backfire on you.



Laith Khalaf, a pension adviser at financial services company Hargreaves Lansdown, says: ‘The whole system is in a state of flux now. Until things settle there is the risk of spending money buying extra years, and then finding you get nothing for it.’

National Insurance threat to the final salary scheme

Almost seven million workers who are members of final salary and other defined benefit pension schemes will be affected by the end of contracting out.



About 1.6 million work in the private sector, while 5.3 million are members of public sector schemes.

Most of these defined benefit pension schemes are contracted out of the State Second Pension, meaning that all members of the pension are also automatically contracted out.



Under current rules, the employer running the pension promises to at least match the extra State Second Pension that staff would have received. In return, the company and employees pay a reduced rate of NI.



Under the reforms, employers will see their NI bill rise from 10.4 to 13.8 per cent of salary while employees pay 12 per cent, up from 10.6 per cent. This will cost someone earning £25,000 a year an extra £270 a year in NI. The extra cost for someone earning £40,000 is £481 a year.



The Government has said employers in the public sector will absorb the cost of the extra NI and will not reduce the pension benefits they pay. This is because the Government has only just put through reforms to trim public sector pensions.



But in the private sector there is the expectation that many employers will baulk at the extra cost of running a pension. A special clause in the proposals will allow employers to cut the value of the pensions offered in future, although all promises made so far have to be honoured.



Alternatively, employers may choose to shut the scheme down, again honouring past promises but switching to the less certain defined contribution system for future pensions.



James Pattern, head of benefit design at pension consultant Aon Hewitt, says: ‘This news comes at a time where there are already significant cost pressures on defined benefit pension schemes from low gilt yields and the extra costs of auto-enrolment.



‘If they haven’t done so already, some employers might feel this is a natural point to call time on defined benefit pension schemes.’

Care is next for major reforms

Reforms to State pensions are just the first of a series of key welfare announcements expected shortly.



A cap on the amount that any individual must pay towards long-term care is also in the pipeline. The aim is to give families more help with the costs where someone faces many years of care.



The cap will follow the principles set out in 2011 by the Dilnot Commission, with individuals paying for their own care up to a set level and then the State shouldering the costs thereafter.



Help: There could be a cap on what people pay

But rather than the Commission’s preferred cap of £35,000, the Government is expected to opt for a higher ceiling, potentially £75,000.



And only charges for ‘personal social care’ will be counted at the rate paid by a person’s local authority (an average £470 a week in 2011), with bed and board charges and extra fees levied by a more luxurious home still the responsibility of the person being cared for.



Care specialists estimate that a cap of £75,000 could see the typical person still paying all bills for about five years before the State steps in. The typical life span of most ‘self-funders’ in care is about four years, although one in ten is still alive eight years after moving into a home.



But Coalition plans to replace childcare vouchers with a package of tax breaks that parents could set against nursery or childminding fees appear to have foundered.



Reports last week suggested a split in Government after Liberal Democrats feared higher earners would be the main beneficiaries.





