3rd February 2009
Pensions are Simple: Stupid! A useful update on State Pension changes
By Chartered Financial Planner Diane Weitz of Ashlea Financial Planning
Am I the only one who struggles with keeping up to date with the changes to State Pension Benefits as well as other changes in the simplified Pensions arena? Thanks here to Steve Bee of Scottish Life who does sterling work through his Beeline e-mails.
The legislation for the basic state pension passed its 100th anniversary in August this year. The first payments were made in January 1909 at the rate of 5 shillings a week to men and women over the age of 70 years. This represented about 20% of the average income at the time. Since 1981 the basic state pension has been linked to the Retail Price Index (RPI) instead of earnings. This means that the current state pension represents about 15.7% of today’s earnings and will be about 14.7% of average earnings in 2012 when the government are proposing restoring the link with average earnings.
The current retirement ages of 60 for women and 65 for men are to be equalised by 2020 and anyone retiring between 2024 and 2046 will have a retirement age between 66 and 68 years. Also anyone retiring after April 5th 2010 will only have to have accrued 30 years contributions in their working life to obtain the full basic State Pension, rather than the 39 years for women and 44 years for men that is the current rule.
Employees who are not in a contracted out pension scheme, or who have not opted to contract out, currently accrue benefits in the State Second Pension S2P. This replaced the State Earnings Related Pension Scheme (SERPS) in 2002, which itself replaced Graduated pension Scheme in 1979. The idea was that all employees should have earnings related pensions. The benefits under SERPS and S2P have evolved over time usually with the result that the benefits have been reduced. The S2P has a complicated structure related to bands of earnings.
Employees who earn at or above the Lower Earnings Limit of £4,680 a year (2008/2009) will be treated as if they had earnings at the Lower Earnings Threshold £13,500 2008/2009). Some carers can qualify for the S2P benefits, even though they may not have earnings, up to the £13,500 level. In addition people who are in receipt of Long Term Incapacity benefit and who have paid sufficient Class 1 contributions in their working life will also qualify for S2P. Those who retire after 5th April 2010 do not need to meet this condition.
The current bands for S2P are:
Band 1: Surplus earnings above Lower Earnings Limit to Lower Earnings Threshold
Band 2: Lower Earnings Threshold to Upper Earnings Threshold
Band 3: Upper Earnings Threshold to Upper Earnings Limit
Upper Earnings Limit is to be replaced with Upper Earnings Accrual (UPA) from April 2009. This limit will be frozen thus capping the entitlement to S2P which will lead to a gradual erosion of earnings related accruals.
From April 2010 the income bands will be reduced to 2 with Entitlement building up at 40% of Band 1 income, and 10 % of Band 2 income.
Further simplification of the S2P is expected, with a likely date of 2012. It is proposed that Band 1 income will give a flat rate entitlement of £1.50 a week for each qualifying year. Accrual will still be calculated on Band 2 income until 2030 when it will be abolished.
Of course by then we will have the auto-enrolment Occupational pension known as the Personal Accounts. These are to be capped at a contribution level of £3,600 per annum. Anybody who also qualifies at retirement for Pensions Credit, Savings Credit, Guarantee Credit, or Housing Benefit is likely to have any savings that they have made into Personal Accounts eroded by between 40% and 100%, but that is another story
Diane Weitz is a chartered financial planner at Ashlea Financial Planning Ltd
Research: State Pensions for Advisers August 2008 DWP
Beeline: Steve Bee
2nd Feb 2009
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