Single Tier Pension
It has long been acknowledged that the State Pension system is complicated, to the point where even the Department for Work and Pensions has problems calculating someone’s benefit entitlement! The problem is that, depending on how long you have been working; your pension entitlement might include the Basic State Pension, Graduated Pension, State Earnings Related Pension and State Second Pension (otherwise known as S2P). This will hopefully be resolved when the Government introduce the Single Tier Pension (STP) in 2016. This will not only make the benefit easier to understand, but it will provide the opportunity for the government to downgrade benefits for those not yet receiving pension, to make the scheme more affordable. As the State Pension Scheme stands today, it is very complicated and it is not fit for purpose. It was first introduced in the early 20th century and was designed to suit the needs of men and women at that time. It does not suit us now because three key things have changed:
Life expectancy - We are living longer. As people live longer lives one of two things must happen. Either people will have to retire later or they will have to spend a greater proportion of their life relying on pension income. The government is basically saying they cannot afford to pay for the latter option.
Women - When state pensions were introduced women were not expected to have a pension in their own right. It was not thought to be necessary since they could rely on their husband's pension, either as a pensioner’s spouse or his widow. Nowadays the majority of women work and the vast majority are expected to earn their own pension rather than relying on a man. In fact many will be better off as a result of National Insurance credits for carers (relevant when taking a ‘baby break’) which effectively replaces the National Insurance that would have been paid, had the carer been working.
The role of the state - Current state pensions were intended to provide an adequate retirement income, and included an earnings-related element that would reward those with greater pre-retirement income. The new Single Tier Pension is designed to be a minimum safety net for people to build on. This government believes its primary role should be to prevent poverty; anything beyond that should be the responsibility of the individual. The majority of those who will receive less under the new regime are individuals who lose out and the government believes that this will be effectively replaced by contributions made through automatic enrolment. Those likely to lose most from the STP are those who are furthest from retirement currently. Those close to retirement should find that their benefits are protected by a ‘foundation amount’ which acts as an underpin to future entitlements.
The basic message is do not rely on the State Pension as your sole source of income in retirement as its focus is changing and is expected to provide a very basic standard of living.
If you are concerned about how these changes may affect you, please contact Jenny Armstrong, robinson+co’s Chartered Financial Planner for more information. Jenny can be contacted on 01900 603623 or by email to firstname.lastname@example.org