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

A single-tier pension: what does it really mean?
SPA than when we assume all contributions end in 2016. This suggests that, on
average, the additional gains outweigh the additional losses. The exceptions to
this are among individuals in the lowest two wealth quintiles, and among
individuals with fewer than five years contracted out of SERPS/S2P. This is
because few of the individuals with these characteristics would benefit from
being able to ‘work off’ past periods of contracting out.
In the remainder of this section we present figures that assume individuals
continue contributing until SPA.
Auto-credits under the single-tier pension
Currently, men aged between the female SPA and the male SPA receive automatic
credits towards the BSP – that is, regardless of whether or not they are doing any
creditable activity, they automatically receive a BSP (but not S2P) credit if they
are aged above the female SPA but below their own SPA. As the female SPA rises
to meet that for men, these ‘auto-credits’ are gradually being phased out. The
government has not yet decided whether auto-credits will continue to exist
under the proposed single-tier system; this is still under consideration. The
analysis presented in this section assumes that auto-credits are discontinued.
Among the sample we consider here, men born between 6 April 1952 and 5
September 1953 (35% of men in our sample) could get at least one year of autocredits
between 2016 and SPA under the current system, if they have not already
got 30 qualifying years for BSP. In our sample, 97% of the men born between
these dates are expected already to have accrued 30 BSP qualifying years before
they would potentially become eligible for auto-credits. Therefore, for the vast
majority, the auto-credits would have no effect on state pension entitlement
under the current system.
However, under the proposed single-tier pension, these auto-credits could have a
much larger impact. For those eligible for auto-credits, following the evaluation
of individuals’ foundation amounts in 2016, a year of auto-credits would boost
single-tier entitlement by £4.18 for all men with foundation amounts of less than
£146.30. Of the men who could be eligible for auto-credits, 66% are estimated to
have a foundation amount below £146.30. As described above, a large proportion
of men who will have a foundation amount below this level are those who have
had prolonged periods of contracting out. In our sample, 94% of men who could
be eligible for auto-credits, who have a foundation amount of less than £146.30
but who have a full BSP have contracted out at some point in the past.
Maintaining auto-credits could, therefore, potentially be very generous to a group
of relatively well-off individuals. It would add to the group of gainers that we
have identified in this section and by much more than our ‘continue to SPA’
assumption reveals, as the auto-credits would accrue to all men who would not
otherwise accrue a qualifying year.
To avoid the benefit of auto-credits accruing to individuals who have been
contracted out for prolonged periods in the past – which was not intended under
the current system – it might make sense at least to restrict these auto-credits
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