The problem: A client is due to qualify for the state pension after the new single-tier pension comes into effect in 2016. How will their state pension entitlement be calculated under the new system and how will pension contributions under the current pension system be taken into account?
The solution: The flat rate or single-tier pension starts in April 2016, a year earlier than originally planned. The existing system will still apply to those retiring before that date.
Salary related contracting-out will cease at the same time the STP starts. The single-tier pension will be £144 per week in 2012/13 terms.
Thiry-five years of NI contributions or credits will be required for the full single-tier pensio, an increase from 30 for the existing basic state pension.
The minimum qualifying period for any single-tier pension will be set at between seven to 10 years NI contributions or credits. Between 10 & 35 years will get you pro rata benefits, i.e. 30/35 x £144 = £123.
No additional benefits will be accrued for more than 35 years of NI contributions or credits.
The single-tier pension can be deferred but no lump sum will be available unlike the current basic state pension.
Self-employed NI contributions will count towards the single-tier pension though it is not clear whether the rate will increase. It will be possible to pay voluntary NI contributions to buy more qualifying years.
The January White Paper indicated the increase to the level of single-tier pension would be by the highest of the growth in average earnings, CPI and 2.5 per cent. However, the draft Pensions Bill 2013 only makes provision for it to increase by the growth in average earnings.
Anyone with an existing history of NI contributions at April 2016 will be entitled to a foundation pension equal to the higher of their entitlement under the new and existing rules.
A contracted-out deduction will be applied for periods of contracted-out employment. The DWP has issued a guidance document, The Single-Tier Transition and Contracting Out, which explains how the deduction is calculated.
If the foundation amount is less that the single-tier pension this can be increased by 1/35th for each year of NI contributions or credits.
If the foundation amount is more than the single-tier pension no further benefits will be accrued but the extra benefits will be known as a protected payment. This will be protected but only by CPI not the triple lock.
The single-tier pension will be based on personal NI contributions rather than the spouses or civil partners. Transitional provisions will recognise inherited benefits.
Abolition of the savings credit
The Pensions Bill 2013 proposes that the savings credit element of the State Pension Credit is abolished. The savings credit will only be available to those who reached state pension age before the single-tier pension starts.
Caroline Kellas is technical support manager at Scottish Life