State Pension Top-Ups
Last weekís Pension Bill announced as part of the Queenís Speech has laid the ground officially for the fundamental changes to the way the Basic State Pension will work in the future. We all knew what the Government had in mind for these changes, they were something of an open secret, but last weekís announcements kind of made them official.
Thatís the way it works with our pension legislation these days; we have seemingly endless periods when weíre engaged in something called Ďconsultationí and during that time everything thatís about to happen is sort of inevitable, but itís Ďin the airí. The reality is everyone knows itís coming, but we canít count on it because talk is, as they say, cheap (and meaningless). The reality of everything only hits in once we see it on the legislative conveyor belt. Thatís when itís real. The changes to the state pension system are now on that conveyor belt, so itís now just a matter of waiting for the Parliamentary process to run its course. Nothing unusual about that; it happens all the time. Itís the way of things kind of thing.
One of the changes thatís been in the air for ages now, but is finally on the conveyor belt of reality, is the change to the number of years of National Insurance contributions people will be expected to make in order to qualify for the full Basic State Pension in retirement. The Basic State Pension is £84.25 a week for single people1 these days, but you only get the full rate if youíve clocked up enough years of full contributions through the NI system. Right now the number of full contribution years required by men and some women is anything up to 44, whereas for most women it is 391. The odd end result of this is that most men today manage to get entitlement to the full basic pension, but most women donít. In fact only 30%2 of women today manage to qualify for the full rate of the basic pension. Thatís because the way an average working life pans out for most women doesnít really give them a fair shot at meeting the high number of target years required to get the full pension. A kind of loaded-dice thing. Itís an unfair system and always has been. Itís a disgrace.
The new Pensions Bill is going to do something about this at last; the intention is to reduce the number of contribution years for people to qualify for a full basic pension down to 30 for all men and all women by 20103. That will obviously help (although not if you retire before then) and should mean that the number of women qualifying for the full basic pension will go up from a miserable 30% today to a healthier 70%2.†Thatís good, of course, but not as good as if the bill had fixed this depressing inequality for 100% of women immediately, but I guess thatís just me being picky again. I feel like Iím always moaning about these things, in fact. Need to chill out. Try my best to see the half-full glass; or the 70%-full one in this case.
Nothingís ever ideal, but if we keep taking tiny steps in the right directionÖ..
I know all that and understand political expediency is what everything comes down to, but I still get hooked up in the day-to-day practicalities of it all. I canít quite ever let go of that. And itís the small stuff that bothers me about the changes that the Pensions Bill will bring in. Up until now anyone who wasnít on target for getting the full rate of the Basic State Pension has always had the opportunity to make up for the lost years by making voluntary National Insurance contributions. If youíre a man thatís not something thatís been likely to bother you much, but many women have needed to understand what voluntary contributions are all about if theyíve wanted a chance at getting the full old-age pension. The government has done a good job recently of bringing this problem to the attention of women.
I wrote a BeeLine a while ago about the four women in my own family, my wife and three daughters, who have all regularly been in receipt of brown-envelope official letters from the government extolling the virtues of having a full National Insurance contribution record and putting the case for making voluntary contributions if youíre the prudent sort. That BeeLine, which many of you wrote in about at the time saying that either you or your clients are in just the same position as the Bee household, was entitled The State Pension and missing NICs and you can read it if you missed it first time round by clicking on the link. That BeeLine struck a chord with many and that makes me think that it is something that will be an issue in families right across the UK. It seems to me that many women will have been concerned by finding out about their pension prospects and many will have made voluntary contributions to make up their shortfalls. The women in my family didnít do that, even though they were worried about their pensions, because I knew what was in the air and I told them not to worry.
Now that the changes to the pension laws look certain I can be smug about things at home and say things like "I told you so" and "Do I know my pensions stuff, or what?" and things like that. But not everyone has the dubious benefit of having a pensions expert at home do they? (Well perhaps in your house they do too, but we have to accept that those of us who hang around the BeeHive arenít really normal, are we?)
The bottom line is many women who have been happily paying voluntary National Insurance contributions to boost their Basic State pension have just found out (or are just about to find out) that they neednít have bothered; they will get a full pension anyway under the new rules from 2010. Itís not a small amount of money involved either. Voluntary payments can be anywhere between £400 to £2,0004 a year so it raises the question of what they can do about the unnecessary payments they have made.
My understanding from reading press reports4 on this is that the government does not intend to refund any unnecessary voluntary National Insurance contributions that women may have made. Iíll pause for a bit while you take in that last sentenceÖ
Got it? Good. Letís hope the press reports are wrong, but I wouldnít bet on it. I suppose itís just another example of people doing the right thing at the time for their pension savings, only to find out that later rule changes mean that action wouldnít have been taken with the benefit of hindsight. Thatís always going to be a problem when our pension system is in a continuous state of flux. We have seen nothing but one wave of pension reform after another for years now, and weíre just about to embark on even more fundamental changes even after the massive upheaval of the A-Day seismic shock weíve just been hit with. If thatís the reality of our pensions world then it seems to me that the government people should look carefully at allowing people to undo past mistakes made in good faith when things were different. Anything else just seems so unfair.
20 November 2006
1.† The Pensions Advisory Service web-site.
2.† DWP web-site - Pensions White Paper 'Security in retirement: towards a new pension system'.
3.† DWP web-site - background documents to Queen's Speech.
4.† Times web-site 20 November 2006.
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