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

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Short-run effect on pensioner incomes Table 4.2. Percentage of individuals entitled to more and less than the full single-tier amount, under current and proposed systems State pension entitlement Current system Men Women All £1 or more below £146.30 p.w. 68.4 91.0 75.4 Within £1 of £146.30 p.w. 2.3 1.5 2.1 £1 or more above £146.30 p.w. Single-tier system 29.3 7.5 22.5 £1 or more below £146.30 p.w. 65.7 77.3 69.3 Within £1 of £146.30 p.w. 5.0 15.3 8.2 £1 or more above £146.30 p.w. 29.3 7.5 22.5 Sample size 741 334 1,075 Source: Authors’ calculations using English Longitudinal Study of Ageing and National Insurance administrative data. It can also be noted from Table 4.2 that only 8% of individuals in our cohorts would actually receive pension income at the SPA equal to the proposed singletier amount – 23% would enjoy a higher income due to pre-existing entitlements, while 69% would have a pension income lower than the full single-tier amount. This may make the simple, largely flat-rate nature of the policy more challenging to communicate, as few individuals will initially receive exactly the full single-tier pension level at SPA. Implications of historic contracting out for entitlements under the single-tier system One reason why a significant fraction of individuals in these cohorts will have a single-tier pension below £146.30 is that many individuals have been contracted out of the second-tier state pension (SERPS/S2P) in the past. While these individuals may appear to have relatively low state pension entitlements, they should have accrued rights in a private pension that (in expectation) are worth at least as much as the state pension forgone and they will have paid commensurately lower NI contributions. It is therefore interesting to illustrate what Figures 4.1 and 4.3 look like if we include these contracted-out pension entitlements as well – that is, if we pretend that these individuals had instead been contracted in throughout their working lives. This is shown in Figure 4.4, with the proportions above and below the single-tier amount summarised in Table 4.3. If no individual had ever contracted out, 95% of men and 67% of women would be entitled to a state pension income under the new system of at least the full single-tier amount based on their accrual up to 2016 (compared with 34% and 23% respectively shown in Table 4.2). Under the current system, assuming no past contracting out, 91% of men and 39% of women would have a state pension income of at least £146.30. In the absence of contracting out, a larger proportion of individuals would see their pension entitlement boosted to the full £146.30 by the new system: 4% of 31
A single-tier pension: what does it really mean? men and 28% of women (compared with the 3% of men and 14% of women shown in Table 4.2). Therefore, it is largely individuals’ past contracting-out behaviour that means that they are below the full single-tier amount in 2016. Ignoring past contractingout behaviour reduces the proportion of individuals entitled to less than the full single-tier amount from 69% to 14%. Although the presence of contracting out does hamper the overall message of simplicity, in that fewer people than one might expect will receive exactly the full single-tier pension amount from the state, this is a necessary complexity of the transition process. It would have been very generous to a group of individuals Figure 4.4. Distribution of accrued state pension income at SPA under current system and under proposed rules – assuming no contracting out A. Current system Cumulative percentage of individuals 100% 90% 80% 70% 60% 50% 40% Full BSP Single-tier amount 30% 20% 10% 0% All Men Women 50 75 100 125 150 175 200 225 250 275 300 B. Single-tier pension Cumulative percentage of individuals 100% 90% 80% 70% 60% 50% 40% Pension income at SPA (£ per week, 2013–14 earnings terms) Single-tier amount 30% 20% 10% 0% All Men Women 50 75 100 125 150 175 200 225 250 275 300 Pension income at SPA (£ per week, 2013–14 earnings terms) Note: Assumes individuals had never contracted out of SERPS or S2P. Source: Authors’ calculations using English Longitudinal Study of Ageing and National Insurance administrative data. 32
Page 1 and 2: A single-tier pension: what does it
Page 3 and 4: Published by The Institute for Fisc
Page 6: Contents Executive Summary 1 1. Int
Page 11 and 12: 1. Introduction In a White Paper pu
Page 37: A single-tier pension: what does it
Page 55 and 56: 5. Long-Run Effect of the Proposed
Page 69 and 70: 6. Wider implications of the propos
Page 75 and 76: 7. Conclusions Pensions Bill 2013-1
Page 77 and 78: References Attanasio, O. and Rohwed

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

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