State Pension Reform

| 14th January 2013

Today, the government announced it’s plans for further state pension reform (in addition to the automatic enrolment, which I’ve discussed here). The key headline is the introduction of a flat rate state pension set at £144 per week, in today’s money, to start from April 2017 (which will likely equal £162 per week).

Flat Rate State Pension

By and large, taxpayers in general will benefit from the change in state pension. The simplification of the system, in addition to the abolition of the second state pension (S2P) and contracting out, will be cheaper to administer and understand.

Those who will benefit most include lower earners and the self-employed, who currently have a basic state pension lower than the proposed £144 per week (those who are self-employed can currently receive a maximum state pension of £107.45 per week). If you’re looking for more information and advice, we’re experienced London accountants for self-employed workers and can help you with your questions. k).

However, some people will be worse off. Although the pension amount is increasing, the government is changing the qualifying criteria for the state pension. Currently, you have to have made NI contributions for 30 years to be eligible for the whole amount, but this is increasing to 35, with a minimum of 10 years. Between 10 and 35 years, you will receive a proportion of the amount. In addition to this, higher earners will also lose out, since the maximum state pension, depending on NI contributions, is £250 per week, but this is being capped at £144. Those who are retiring before April 2017 will be on the current system, so will miss out on the £144 per week.

End of contracting out

Currently, employees can ‘contract out’ of the secondary state pension to receive a pension from your occupational or personal/stakeholder pension. If you are contracted out, then your NI contributions will be lower. If this is the case, then you will face a one-off deduction to the basic pension to reflect the reduced NI contributions made. Those who are contracted in, with pension values below £144 will see them rise to this value, and those worth more than the cap will be allowed to keep that amount of pension.

For those in final salary schemes, NI contributions will rise. For someone earning £25,000, this could cost an extra £270 per year.

Those who will benefit from this change include public sector workers, who will still receive their final salary pensions, in addition to the more generous state pension.

State Pension Age

One final thing to note is that 10 years notice must be given for any future changes in the state pension age.

For advice, or any queries you have about how the reforms will affect you, get in touch with a chartered accountant or financial advisor.


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