UK: Government Shake-up For The State Pension

Last Updated: 26 June 2013
Article by Justin McGilloway

On 14th January 2013, the Pensions Minister, Steve Webb, unveiled a radical reform of the UK state pension system. The current two tier system consisting of the Basic State Pension and SERPS/State Second Pension is to be replaced with a single tier pension with effect from April 2017. The detail is contained in the draft Pensions Bill 2013.

The main drivers behind the reforms are:

-          Simplicity for a system which is inherently complex and difficult to understand and to administer;

-          Solid platform for individuals to save for retirement;

-          Clarification of what individuals will actually receive when they retire; and

-          Fairness for certain sectors of the workforce who currently miss out on a decent state benefit.

The new unified flat rate pension

The new state pension rate will be £144 (in today's money) per week. This simple flat rate of pension is set above the basic level of means-tested support (currently £142.70 per week for a single pensioner). To be eligible for the full amount, an individual will require 35 years of National Insurance Contributions (NICs) or credits (it will still be possible to top up NICs to increase the number of qualifying years). Those with a lower number of qualifying years will receive a proportionately smaller amount, however a minimum qualification threshold of between seven and ten years will be introduced so that only those who make 'a significant economic or social contribution' are eligible.

But there's a catch….

Under the contracting-out regime, schemes undertake to provide a pension broadly equivalent to the State Second Pension in exchange for lower NICs. The introduction of single tier pension means the end of: (i) the State Second Pension; and (ii) the ability for defined benefit pension schemes to contract-out of the State Second Pension.

This means, for previously contracted schemes an increase in NICs for employers and employees in defined benefit pension schemes. For employers this is 3.4% of NI earnings and for the six million employees affected it will be an extra 1.4%. Many employees are likely to find this hike unaffordable whilst employers will be hit hardest having to divert even more resource away from their business objectives. A proposition that many sponsors of defined benefit schemes will find difficult to swallow.  That said, in order to allow employers to mitigate this cost, the draft legislation includes a limited override to enable employers of contracted-out schemes to amend their scheme's rules to alter a member's future accrual of benefits, or employee pension contributions, without trustee consent (if it would otherwise be required). On the other hand, public sector employers with contracted-out defined benefit schemes will not be able to pass on increased NICs to workers either through reduced benefits or higher contribution rates - a further bug bear for the private sector.

Transitional arrangements

Transitional arrangements will protect those who have a pre-implementation NICs record. This will ensure that individuals' pre-implementation NICs are recognised and counted at the implementation of single tier, whilst also allowing people who had been contracted-out to build up to the full single-tier weekly pension.

How do the proposed changes affect people?


People who have taken time out to bring up children or care for family: the single tier pension will mean that those individuals who take time out to care for their family can get a full state pension in their own right. This will typically benefit more women who for too long have been punished by the current system as credits are only given for the basic state pension.  The Government estimates that about 750,000 women reaching State Pension Age in the first 10 years after implementation will receive an average of £9 a week or more.

Public sector workers: likely to be better off when they retire as long as it is after 2017. They will pay increased NICs but will benefit from the higher single tier pension. The automatic override to allow amendments to increase member contributions or reduce benefit accrual rates is currently restricted to the private sector;

Self-employed: this sector of the workforce does not currently qualify for the State Second Pension. Now they will qualify for the whole flat rate single tier pension; and

Married couples: currently a married couple gets £171.85 a week. Under the reforms both individuals could earn £144 each, or £288 in total.


High earners: the abolition of the State Second Pension means there will be no opportunity to build up this additional element of state pension. This can be worth up to an additional £150 per week on top of the Basic State Pension;

Younger/potential workers: younger employees are by and large losing out because the benefits they could build up under the current system are greater than £144 per week if they were to work for their full working life. The Government estimates that 50% of workers retiring in 2060 will be at least £2 per week worse off. This sector of the workforce will also be at the mercy of future hikes to the State Pension Age (State Pension Age will be reviewed every five years and ten years notice given of any change. Currently it is set to increase to age 66 by 2020, age 67 between 2026 and 2028 and reach age 68 by 2046.); and

Married women without enough qualifying years to be entitled to their own single-tier pension will lose out. Currently, women who have no entitlement at all can get a state pension worth 60% of their husband's state pension, and inherit his pension when he dies, but the new rules will base pensions on each individual's NICs and prevent inheriting or sharing of state pensions. 

The Work and Pensions Committee will be conducting the pre-legislative scrutiny of the Government's single tier pension proposals set out in the Pensions Bill. The deadline for written submissions is 15 February 2013 with a report on the findings due by Easter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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