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

3. Proposed Reforms
The main proposal of the Pensions Bill 2013–14 is to combine the basic state
pension (BSP) with the state second pension (S2P) to create a new single-tier
pension. Alongside this, the Bill proposes abolishing the pension credit savings
credit. We describe the single-tier pension in more detail in Sections 3.1 and 3.2,
before discussing the transition issues in Section 3.4. Section 3.3 discusses the
specific issue of contracting out. Section 3.5 describes pension credit and what
the implications of abolishing the savings credit would be.
3.1 The proposed single-tier pension
Under the Pensions Bill proposals, from April 2016 anyone earning above the
lower earnings limit (LEL) or engaged in a number of other types of ‘creditable’
activities would accrue entitlement to a flat-rate amount of future state pension
income. The list of creditable activities is set out in Table 3.1 – the first two
columns of this table repeat what was presented in Table 2.1 for the current
system. Essentially the same set of creditable activities that currently earn an
individual entitlement to the BSP would also earn an individual entitlement to
the single-tier pension, but these are a slightly broader set of activities than those
for which an individual currently earns entitlement to S2P.
The amount accrued in any given year would be equal to 1/35 of the full single-tier
pension amount, irrespective of which of these creditable activities an individual
was doing or exactly how much they paid in National Insurance (NI)
contributions. In other words, an individual would need 35 years of any type of
‘contributions’ in order to receive the full single-tier pension.
Once an individual had accrued 35 years of entitlement, they would earn no more
entitlement for additional years of creditable activities or payment of NI
contributions. The Pensions Bill also proposes that individuals who accrue less
than some minimum number of years of contributions will receive no state
pension at all; the White Paper suggested this minimum should be no more than
10 years of contributions (this was increased from the Green Paper, which
originally proposed a minimum of 7 years). 25 Figures presented in this report
assume that the threshold is set at 10 years.
The exact level of the proposed single-tier pension is yet to be finalised, but the
White Paper suggested that it should be £146.30 per week (in 2013–14 earnings
terms). This level would be sufficient to ensure that no individual with full
entitlement would qualify for the means-tested pension credit standard
25 Pensions Bill – http://www.publications.parliament.uk/pa/bills/cbill/2013-
2014/0006/2014006.pdf. White Paper – Department for Work and Pensions, 2013a. Green Paper
– Department for Work and Pensions, 2011.
15
© Institute for Fiscal Studies