Thousands of women in Scotland will get a better retirement income after it was confirmed in the Budget that the introduction of the flat-rate state pension will be brought forward a year.
However, the revised timetable, initially revealed by the Chancellor earlier in the week, will leave some worse off and could accelerate the decline in final salary pensions.
The white paper outlining the universal state pension was published by the government in January. It set out a pension worth £144 a week (at today’s prices) that would be introduced in 2017 and be available to anyone with 35 years of national insurance contributions (NICs) under their belt. Those will between ten and 35 years of NICs will get a pro rata payment, but those with fewer than tenyears will not quality.
The 2017 date left around 85,000 women out in the cold because of the acceleration in the women’s state pension age. That is set to hit 65 in 2018 and 66 by 2020, with the gradual increase beginning in 2010.
Those who were set to miss out were born between 6 April and 5 July 1953, meaning that while they have to wait longer for their state pension age it will still fall before April 2017, leaving them ineligible for the universal pension.
The campaign to redress that was led by Ros Altmann, director-general of Saga, who said she was “delighted” by the change.
“The reason it was so indefensible to start the state pension reform in 2017 was that ministers had previously promised all women who had to accept a second increase in their state pension age, at very short notice, would at least be included in the new state pension in order to ensure they were compensated for delay in receiving it.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, also welcomed the news, albeit with a fresh warning for workers in their forties and fifties.
“It is inevitable that we will soon hear further announcements concerning a more rapid increase in the state pension age. I expect to see age 70 on the timetable before too long.”
As always, however, where there are winners there will be losers. The single tier pension will benefit women who don’t currently qualify for the full state payment because they have insufficient NIC records, often because of time out of work raising a family. Those career breaks will now count towards NICs. The self-employed gain too. They only qualify for a state pension of £107.45 a week under the present system, but they will be eligible for the full single rate from 2016.
But many will lose out, including members of final salary (defined benefit, or DB) schemes in both the private and public sector.
The flat-rate pension will take effect in parallel with the abolition of contracting out, where employees have opted out of the state second pension and pay NICs at 10.6 instead of 12 per cent as a result.
Now contracting out will end in 2016, meaning millions of workers face higher NICs.
Zoe Lynch, partner at pensions law specialist Sackers, said: “Pulling forward the introduction of the flat rate state pension from 2017 to 2016 will undoubtedly be a benefit to many, particularly women and the self-employed. But a crucial knock-on effect of the introduction of the flat rate state pensions will be the abolition of DB contracting out.”
More than eight in ten final salary schemes still open to either new or existing members are contracted out, according to the National Association of Pension Funds.
When contracting out ends in 2016 the government will pick up an extra £5.5 billion in NICs from employers and employees, suggesting a possible motivation for the measure being brought forward a year.
The increase in NICs for employers is expected to spell the demise of yet more final salary schemes in the private sector while adding to the cost of running public sector schemes, claimed John Wright, partner at Hymans Robertson.
“It is regrettable that the cost reductions from pension reforms will be wiped out at a stroke by these DWP proposals, due to the higher NICs which public service employers will have to pay,” said Wright.
“Westminster has reformed public sector pensions to make modest savings on the one hand, only to take these away and add further costs with the other. Unless the pension reforms are amended, to counteract the added costs from these DWP proposals, then public services will suffer further.”
While the flat rate pension will leave some better off than others, what everyone will benefit from is more certainty in what to expect from the state when they retire.
That’s especially relevant in the context of automatic enrolment, the reforms launched last October that will see millions of people saving into workplace pensions for the first time.
“People will have surety about what to expect from their employer and their workplace scheme too,” said Jamie Jenkins, head of workplace strategy at Standard Life. “This clarity is vital when people are planning for their future and an important part of their life.
“The introduction of the flat rate pension is just part of the whole pensions reform story.”