Jam Jar savings

The Department of Work and Pensions has issued their document ‘The single-tier pension: a simple foundation for saving’.

A flat rate pension of £144 per week will replace the current 3 tier system of the basic state pension, the additional state pension and the graduated pension; however the changes will only affect retirees on or after 6 April 2017.

There will be winners and losers as a result of these changes. The self-employed will be big winners whereas unfortunately ex-spouses may be amongst the losers.

I have summarised below the main issues.

Minimum Number of Contributions

Whereas under the current system there is no minimum number of years to qualify for a state pension the new system will require a minimum of 7 – 10 years to start to qualify for a single tier pension.

Issues for family lawyers

Some spouses who do not reach state pension age before 6 April 2017 and do not have a sufficient NI contribution history may not qualify for a single tier pension.

Maximum Number of Contributions

To qualify for the full single tier pension of £144 per week it will be necessary to have paid qualifying National Insurance contributions over a period of 35 years rather than the current 30 years

There will be a reduction in completed years to account for contracting out. The details of how this reduction will apply are awaited.

Issues for family lawyers

Some spouses may only qualify for a proportionate single tier pension.

Some higher earners or older people may have had a higher expectation from the current system. These higher expected benefits may have been factored into a pensions report.

Duxbury tables assume that currently a full state pension is payable. This may result in the capital settlement being insufficient to support the required income levels.

State Pension Age

The state pension will be equalised for men and women at age 65 by November 2018.

It will then be increased to age 66 by October 2020.

For those born between 6 April 1960 and 5 March 1961 the state pension will increase steadily to age 67. Those born on or after 6 March 1961 it will be 67.

State pension age will then be reviewed every 5 years and it is expected it will increase in line with life expectancy

Issues for family lawyers

With the state pension not being paid until a later date maintenance agreements may need to be revisited.

With public sector pension schemes moving their normal retirement ages in line with the state pensions age then pension credits might become payable a lot later than expected.

Substitution of records on divorce

Currently it is possible to substitute the National Insurance records of either a deceased or former spouse if they had a better National Insurance record. This will not be available for people reaching state pension age after 6 April 2017.

Issues for family lawyers

Previous pension reports may have anticipated that state pensions would be dealt with by substitution of national insurance records. This would now seem not possible leaving one party (usually the wife) with a lower pension income on retirement.

Pension Sharing Orders

At present the additional state pension can be subject to a pension sharing order. This won’t be available after 6 April 2017.

Issues for family lawyers

Existing pension sharing orders will be honoured but it is not clear if this will be fully in addition to the persons state single tier pension or as a protected amount at 6 April 2017 but with no ability for additional accrual. This is something we are seeking clarification on.

Means Tested Benefits

The savings element of the pension credit will cease with the introduction of the single tier state pension.

The Minimum Income Guarantee however will stay as a safety net.

Inflation proofing

The current triple lock guarantee system of increases of the greater of CPI, earnings or 2.5% will probably still apply.

Transitional protection

If at 6 April 2017 an individual has accrued under the current system a higher level of benefit than the single tier state pension then they will keep this entitlement, known as the protected payment. This excess benefit will only be uprated by CPI and not the triple lock guarantee.

State Pension Deferral

At present it is possible to defer receiving a state pension with the option to take the deferred amount either as additional income or as a lump sum. From 6 April 2017 the lump sum option will be withdrawn.

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