SOCIAL SECURITY BENEFITS/PENSIONS – STATE BENEFITS
Synopsis: A paper dealing with the transition to the single tier state pension has been published by the DWP.
Date posted: Tuesday, February 19, 2013
The DWP website is not the most user-friendly of sites, as anyone who has tried its search facility will know. Sometimes additional information will appear on a page with no corresponding announcement. A good example is the latest document to appear on the single tier pension web page. There is now a Technical Note on the transition to the single tier.
The Note repeats much of the detail in the original White Paper (see our earlier Bulletin) on the calculation of the foundation amount – the amount of state pension deemed to have been earned at the start of the new system. However, the Note also gives more extensive details of the adjustment that will be made for periods of contracting out, something that was absent from the White Paper.
As a reminder the foundation amount will be the greater of:
1. Current scheme valuation The state pension benefits (basic + graduated + adjusted additional) accrued under the existing state pension regime; and
2. Single tier valuation The state pension value based on the number of qualifying years before the changeover, the 35 year accrual period, the new single tier rate (£144 assumed) less an adjustment for any period of contracting out.
The DWP reveals in the Note that ‘around 30 per cent of people reaching State Pension age in the first ten years after reform would have a valuation based on the single-tier rules in 2017 that would be higher than the current rules valuation’, i.e. they will win because of the reform. On the other hand ‘around 15 per cent of people reaching State Pension age in the first ten years of reform’ will have a foundation amount over £144 on the DWP’s calculations. These people will therefore be unable to accrue any more state pension benefit, but still have to pay full NICs.
The Note says:
· The calculation of the current scheme valuation will have potentially involved an adjustment for periods of contracting out up to 5 April 1997, the Contracted Out Deduction (COD). This is derived from an existing calculation, normally undertaken at state pension age, and broadly reflects the total value of any GMPs (actual or, for money purchase, notional) to which the person is entitled.
· The calculation of the single tier valuation will potentially involve two adjustments:
• the COD for contracting out up to 5 April 1997; and
• the ‘Rebate Derived Amount covering later periods’, which stems from a new calculation. The Note says that this will be ‘broadly equivalent to the value of additional State Pension a person would have been entitled to, had they not made contributions on a contracted-out basis after 1996/97.’
The Note gives an example to explain the process:
‘Mr Clark was born in 1952. He is due to reach State Pension age in May 2017 and has built up 40 qualifying years. Based on his contribution record he would have been entitled to an additional State Pension of £45 a week. As Mr Clark has been a member of a contracted-out pension scheme during his working life, we need to take account of this time spent contracted out to reflect the National Insurance rebate he received.
Current scheme valuation
£107 + £45 – £45 = £107
equals basic State Pension plus additional State Pension minus COD (cannot be less than basic state pension)
£144 – £92 (£45 + £47*) = £52
equals qualifying years valued under single-tier minus rebate derived amount
* £47 to cover the period 1997 to 2017 for which there is no corresponding additional State Pension entitlement as he was contracted out.
The valuation under the current scheme rules is greater so that valuation would form Mr Clark’s state pension award. Mr Clark is unable to build further qualifying years as he is due to reach State Pension age in 2017.’
This appears to be a somewhat crude adjustment which will disadvantage many people with both SERPS/S2P accrual and preserved private sector DB benefits. The fixed rate revaluation of GMP in such instances will usually mean a higher COD than the additional pension that would have been earned. That excess will eat into the value of the contracted-in additional pension benefit.