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The new state pension from 6 April 2016 and members NI Contributions

18/2/2016

From 6 April the Basic State Pension and Second State Pension (S2P) will end and be combined/ replaced by a new State Pension. Those who are paying reduced rate NI Contributions at the moment because they are in a work place pension scheme that is better than the Second State Pension will start to pay the standard NI contributions and start to earn a higher State Pension.

Who will it apply to?

This will apply to nearly all our members who are contributing to a workplace pension e.g. LGPS, NHSPS and private sector pension schemes.

How are National Insurance Contributions being calculated up to April 2016

If someone earns more than the Lower Earnings Limit currently £5824 a year (£112 a week) they will start to qualify for a State Pension. If they earn above what is called the ‘primary’ threshold currently £8060 a year (£155 a week) they start to pay NI contributions on earnings above that figure.

If they are in the Second State Pension they pay 12% on earnings up to the Upper Earnings Limit (£827 a week from April 2016) that is NOT in a work place pension that is contracted out of the Second State pension.

If on the other hand they are not in the Second State pension because they are paying into a work place pension instead that is contracted out of the Second State pension, they currently pay a reduced rate of 10.6% from the primary threshold up to what is called an ‘Upper Accrual Point’ of £770 a week and then pay 12% up to the Upper earnings Limit. On earnings above the Upper earnings limit the contribution goes down from 12% to 2 %

At the moment those who are contracted out also get a further small reduction on earnings between £5824 a year and £8060 a year.

How will National Insurance Contributions be calculated from April 2016

So after 6 April 2016 everyone will be paying 12% between £8060 a year and £43004 a year into the new State Pension. On earnings above Upper Earnings Limit of £43004 a year from April (£827 a week) they will continue to pay just 2%.

Set out below are some examples from the LGPS, NHSPS, Water, Energy and Voluntary Sector. They are purely illustrative of typical jobs and levels of pay in the sector. There may be small differences due to rounding in the NI calculations. The reduction in take home pay will be offset to certain degree by changes in tax thresholds from £10600 to £11,000 and if they receive a pay rise round April

Of course the person has to be a member of the relevant work place pension scheme. If they have opted out or haven’t joined; they already pay the higher rate.

Key Messages

For those who reach their State Pension Age after 5 April 2016 will have their State Pension calculated on the new basis. The full State Pension from 6 April 2016 will be £155.65 a week if a person has a minimum of 35 qualifying years and no contracted out service in a work place pension scheme like the LGPS,NHPS etc...

If you have a lot of contracted out service and you would have qualified for the pre April Basic State Pension your minimum new State Pension at 6 April 2016 will be the single person’s Basic State Pension of £119.30 a week from April not the £155.65 a week.

If you are still working after April and earning above the lower earnings limit you will earn extra pension up to the maximum of £155.65 a week (this will be increased in line with the better of average earnings, inflation (CPI) or 2.5%).
If your State Pension is less than £155.65 per week you can earn extra state pension up to your State Pension Age or until you reach the maximum pension that starts at £155.65, whichever occurs first. For every year you pay at the higher rate you would be earning based on the starting pension, £4.45 a week extra pension until you reach State Pension Age or you reach the maximum State Pension (that is 1/35 X £155.65 = £4.45 a week).

So for most of our members in workplace schemes they will be paying more NI but earning extra State Pension at a very reasonable price.
The new full State Pension is still below the poverty line so members should not leave their workplace pension scheme.

In the LGPS where the opt out rates are highest amongst low paid staff the message is if you feel you cannot afford the higher NI and stay in the LGPS consider electing to pay half your normal contributions to the LGPS to get a lower benefit until you can afford to pay at the full rate again.

Everyone should apply in writing or on line for an up to date state pension statement
https://www.gov.uk/government/publications/application-for-a-state-pension-statement

What are the other issues?

There is a big issue on who will pay the pension increase on the part of the workplace pension the member would have got if they had contributed to the Second State Pension instead of their workplace pension.

Until April this increase has mainly been paid as an addition to the state pension. From April depending on the rules of the scheme either the pension scheme will now have to pay or it simply won’t increase in line with inflation anymore for anyone who reaches State Pension Age after April 2016.

Public Sector schemes like the LGPS and NHSPS would pay the increase unless the government allows them to change the rules. Good news for members, but another burden on the schemes that could feed into further cuts and job losses.

There is a danger that a number of women and men who reach state pension age after April will be worse off as spouses pensions attached to the basic state pension are being withdrawn. They will not be able to increase their state pension using their spouse or civil partner’s (or late or former spouse or civil partner’s) NI contributions but if they are widowed they may still be able to inherit some additional State Pension under transitional rules.

The increase and equalisation in State Pension Age has meant that particularly women born in the first half of 1950’s are being faced with a larger than expected increase in their State Pension Age. The government is being pressured into looking again at the transitional period and possible compensation for women whose State Pension Age is set to rise by more than a year by April 2020. There is a petition with currently 148,000 signatories and ongoing debates in parliament.
https://petition.parliament.uk/petitions/110776

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TUC Pensions Conference

5/2/2016

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There are major changes happening to our pensions, many of which workers are ill equipped to face, and policy is not keeping pace with the challenges ahead.

Today, I was at the TUC pensions conference. The pensions minister, Ros Altmann, gave an overview of government pension policy including auto enrolment, pension flexibilities, potential changes to tax relief and the impact on Defined Benefit schemes.

Auto enrolment opt out rates are very low at only 10% and this has undoubtably been a success. It's too early to be sure how successful in Scotland as a number of big employers with quality schemes have deferred their start date. The big challenge is that only 10% of employers have started a pension scheme - 1.8m employers have yet to start. Small employers are a particular problem as they have less capacity. We should also be concerned about the quality of some schemes and many employers are not choosing a tax efficient scheme. Keeping the trigger at £10,000 is a help, but still discriminatory against part-time women workers. The minister accepted the need to strengthen consumer protection, particularly when the secondary annuity market kicks in.

The Minister argued freedom not to buy an annuity was a positive move, emphasising unbiased guidance from Pension Wise. There were plenty of sceptics in the audience on quality of advice available and £millions flooding out of pensions as a result. Is a 45 minute interview really adequate for such a risky decision? This will all create huge long term problems for a short term gain to the Treasury.
She also recognised the challenges facing Defined Benefit schemes, not least because of the end of contracting out this April - another cash cow for the Treasury at the expense of quality pension provision. The volatile investment market is another challenge and how pension funds respond with new risk models. Sadly, very few answers from the minister on this one.

Otto Thoresen from NEST pointed out the challenges for people having to make complex decisions about what to do with their pension pot. You need to be an investment manager, actuary and have an all seeing crystal ball! NEST is seeking to provide an option that provides flexibility, but retains a default pathway.

Gregg McClymont, former shadow pensions minister, now at Aberdeen Asset Management, described government policy as changing savers into investors. For those in DC schemes they are no longer pension savers, they are pension investors. He also emphasised the skills people need to make informed decisions as being Nostradamus and Galileo merged. Most people will need a lot of help to make the right decisions.

David Pitt-Watson from the London Business School questioned how someone who pays into a DC scheme all their working life can be assured that they will have a sustainable income in retirement. They want trusted providers and strong consumer protection. They also want a simple system to achieve a predictable income for life. DB schemes provided that predictability, but DC schemes with annuities suffered from low interest rates and excessive profits. This matters because the rich don't need to worry, but the poor will run out of money - they need large scale collective provision for DC schemes that shares risk. Experience elsewhere in Europe shows that this could deliver between 30% and 60% higher returns. Government is failing to deliver the framework for this.

The discussion focused on the weakness of market systems. What people really need is a better state pension scheme, rather than a market they don't understand run by providers who have a track record of ripping them off. We should also remember that the move to DC is also driven by employers wanting to cut costs and transfer risk to workers.

Owen Smith MP the Shadow Secretary of State for Work and Pensions said we need a much more robust assessment of pension reforms, particularly for those with small pension pots. He argued that government has been gambling with future pension provision. Discussion has become muted about the impact major demographic changes, growing household debt, falling saving ratios, declining wages and job insecurity all have for pensions. Women pensioners are facing particular discrimination in occupational and state pension changes. Government is guilty of misselling state pension changes, something the current government pensions minister said before taking up her current post.

He concluded with the words of Lloyd George when introducing the first state pension scheme a century ago. He described pensions as "The fruit of security for our society". A good quote for today!

The afternoon panel session took a closer look at auto-enrolment. Speakers emphasised the success of the policy, as the PPI speaker put it, 'inertia is a powerful force'. Although with only the big employers, the ACA speaker said, 'that is the easy bit'. However, it has been less effective in addressing pension disadvantage, particularly for women, the low paid and those in ethnic minorities.

Future challenges include the increase in employee minimum contributions and whatever the Chancellor decides to do with tax relief in the Budget. The ACA argued that there is a need to gradually increase contributions up to around 16% - less than that is not going to provide meaningful levels of pension income. The CBI speaker predictably urged caution on this, referring to a range of employer costs in addition to pensions. Others questioned if this would have a negative impact on wage growth.

In summary, the theme of the conference for me was that pension reform is moving away from the traditional characteristics of a pension. Treating pension pots as investments rather than savings, places a huge risk burden on the individuals who are least able to respond. That places even more control in the hands of market players who have a very poor track record, particularly on costs. When coupled with demographic and workforce changes, pensions face real challenges. Government cannot abstain from this because the taxpayer will have to pick up the pieces from market failure.

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The new state pension from 6 April 2016 and members NI Contributions

TUC Pensions Conference

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