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Changes to State Pensions
The Single Tier Pension
On 14 January 2013 the Government announced a proposed change to the state pension system. From April 2016 a new single-tier state pension was introduced to replace the previous state pension system.
Prior to 6 April 2016 the current state pension was split into two elements; the basic state pension and the state second pension (S2P) (formerly known as the State Earnings Related Pension Scheme or SERPS). The amount of an individual's basic state pension depends on the number of years national insurance contributions which are paid.
Prior to 6 April 2016 the LGPS (and other occupational pension schemes) was contracted-out of S2P as an alternative pension was provided to its members, which is guaranteed to be at least as good as (and generally is a lot better than) the S2P otherwise paid as part of the state pension system. As a result, members of contracted-out pension schemes pay reduced national insurance contributions (NICs).
Changes from 6 April 2016
A new single tier, flat rate State Pension was introduced for people reaching State Pension Age after 5 April 2016. The new State Pension replaces the basic and additional State Pension which was in place up until 5 April 2016.
The single-tier pension will:
- Replace both basic state pension and S2P and be set above the basic level of means tested support.
- Require 35 qualifying years of national insurance contributions (or credits) (NICs) for the full pension. Those with an incomplete contribution record will have the pension pro rated subject to a minimum qualifying period of between seven and ten years.
- Be based on individual qualification: it will not be possible to build a pension entitlement based on a spouse or civil partner's NICs.
What is contracting-out?
Contracting-out is when employees leave the additional State Second Pension (S2P) as a result of joining a contracted-out occupational pension scheme. Members of the LGPS currently automatically contract-out of S2P. To reflect this, they receive a rebate of National Insurance contributions (NICs).
There are two main rates of National Insurance payable - 'A' rate (not contracted-out) and 'D' rate (contracted out). Therefore, as a member of the LGPS you are contracted-out of S2P and pay 'D' rate NICs. It should be noted that before 1977 married women and widows could elect to pay a reduced rate of NICs often referred to as the 'married woman's rate' ('E' rate). If this applies to you, you will have received a certificate, from the state scheme, in the past confirming this. If employed, your employer will hold this certificate and deduct a lower rate of NICs from your pay.
What is the difference between 'D' rate and 'A' rate National Insurance contributions?
'D' rate is a lower rate of National insurance payable for members of a contracted-out pension schemes. 'A' rate is the standard class of National insurance payable for employees who are not-contracted out. In 2012/13 a member of a contracted-out pension scheme pays 1.4% less of their pay in NICs when compared to a person paying 'A' rate NICs.
The introduction of the single-tier pension means that contracting-out will be abolished. This means that both employers and active members of contracted-out defined benefit schemes, such as the LGPS, will see an increase in their national insurance contributions to the non-contracted-out 'A' rate i.e. an increase of 1.4%.
Where can I find out more?
The Department for Works and Pensions have produced a series of factsheets which provide further information on the changes to the State Pension and how they will affect you.
- New State Pension myth busting
- Four Ways to increase your State Pension
- Five National Insurance Credits which might apply to you
- Topping up your State Pension