A single-tier pension: what does it really mean? - The Institute For ...

Current state pension system
• Anyone earning between the LEL and the lower earnings threshold (LET) or
engaged in other creditable activities (as detailed in Table 2.1) accrues
entitlement to a flat-rate amount of S2P income. A year of flat-rate accrual is
equal to approximately £1.70 of weekly pension income. 9
• Anyone earning above the LET accrues entitlement to this same flat-rate
amount but also accrues additional entitlement that is proportional to the
level of their earnings between the LET and the upper accrual point (UAP).
The maximum S2P entitlement one can currently accrue in 2013–14 terms is
approximately £2.76.
Additional S2P entitlement can be accrued for every year of working life. The
maximum potential length of working life depends on one’s SPA: for example,
someone who turned 16 in 1978 10 (with a SPA of 67 under the latest proposals)
has a potential working life of 51 years (from age 16 to age 66, inclusive).
To illustrate how accruals operate under the current system, Box 2.1 describes
three example people and explains how much extra state pension income they
Box 2.1. Examples of future state pension accrual under current
legislation
The following examples describe hypothetical individuals in the year 2016. All
monetary figures are expressed in 2013–14 earnings terms.
Lucinda is 35 years old, is employed and earns £900 a week. She regularly saves
money into a personal pension and also receives a pension contribution from her
employer. In return for paying National Insurance contributions on her earnings
for a year, Lucinda will accrue extra state pension income worth £6.20 per week,
which she will receive from the age of 68.
Jacob is 29 years old, is employed and earns £115 per week. He does not save in
a private pension. In return for paying NI contributions on his earnings for a
year, Jacob will accrue extra state pension income worth £5.30 per week, which
he will receive from the age of 68.
Yousef is 58 years old and spends 35 hours a week caring for his mother.
Between the ages of 20 and 55, he was self-employed and paid class 2 NI
contributions; he therefore already has full entitlement to the BSP. In
recognition of his caring responsibilities, Jacob will accrue extra state pension
income worth £1.70 per week, which he will receive from the age of 66.
2013–14 earnings terms, they will appear to be slightly lower than the nominal thresholds today.
We assume that average earnings growth evolves as forecast by the Office for Budget
Responsibility (Q2 average earnings growth from the Economy Supplementary Tables
accompanying Office for Budget Responsibility (2013)).
9
This ‘flat-rate accrual amount’ is set in legislation and uprated with average earnings growth
each year.
10 Earnings-related state pension accrual began in April 1978.
7