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

3.4 Transition issues
Proposed reforms
The government plans to introduce the single-tier pension in April 2016, in a way
that transfers rights to the new system as quickly as possible. From April 2016,
all that will be needed to calculate an individual’s state pension income is their
‘foundation amount’ (defined below), their activities since 2016 and the level of
the single-tier pension. In contrast to previous reforms to the state pension
system, it will not be necessary to retain an understanding of the rules governing
previous incarnations of the state pension system or to keep a record of the full
history of an individual’s working life. This would, therefore, make the new state
pension system significantly simpler than the current system.
In this section, we start by discussing the mechanics of the proposed transition to
the single-tier pension before highlighting some of the implications of the
transition arrangements. A full discussion of the winners and losers in the short
term is left to Chapter 4.
The mechanics of transition
In April 2016, every working-age individual’s accrued pension entitlement
(including entitlement to the BSP, GRP, SERPS and S2P) will be combined to form
their ‘current scheme valuation’. This will only include entitlement accruing from
the individual’s own contributions – that is, derived or inherited rights will not be
taken into account. This ‘current scheme valuation’ will be compared with the
individual’s ‘single-tier valuation’, or the amount of single-tier pension
entitlement that they would have accrued if they had spent their working life up
to 2016 under the single-tier system instead. 31 Entitlement as of 2016 will be the
higher of these two valuations, and will form the individual’s ‘foundation
amount’.
Those who have contracted out in the past will face a ‘contracted-out deduction’
to their valuations under the current and proposed systems, to account for the
fact that they will have built up entitlement in a private pension scheme.
This process is illustrated in Figure 3.1, which shows the calculation for the same
three individuals who were described in Box 2.2. Zainab will have been selfemployed
for 38 years by 2016, having started self-employment at the age of 21.
She has 35 qualifying years for the BSP, but no entitlement to GRP/SERPS/S2P.
Her single-tier valuation (£146.30) will be higher than her current valuation (a
full BSP, worth approximately £109 in 2016–17).
Mohammed has been employed and contracted in since the age of 21. His singletier
valuation would be £146.30, as he has more than 35 qualifying years. This is
lower than his current scheme valuation of £184.00. Therefore, his foundation
amount will be set equal to his existing entitlement under the current system.
31
Activities that were previously credited for the BSP will be treated as accruing credits to the
single-tier pension.
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