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

Long-run effect on pensioner incomes
There are some groups who, under current legislation, would accrue only BSP
and not S2P. These include those who are in self-employment, those receiving
jobseeker’s allowance and those who will be newly credited under universal
credit (for example, those with multiple jobs earning below the LEL who may
now be credited on the basis of their household income). We abstract from these
groups in the following analysis; however, in Section 5.3, we examine the impact
of the proposed reforms on the self-employed, and our conclusions there also
apply to any others who would spend long periods of their life under the current
system accruing entitlement to the BSP and not the S2P.
One year’s accrual of BSP and S2P under the current system would be worth
more (in terms of income at SPA) than one year’s accrual of single-tier pension
entitlement; but the latter would be worth more than a year of BSP accrual on its
own. For example, under current legislation, an individual engaged in a creditable
activity or working and earning at the LEL in 2016–17 would accrue entitlement
to around £3.63 of BSP and £1.70 of S2P income at SPA, giving a combined
accrual of £5.33. 52 This compares with £4.18 under the proposed system. 53
Exactly how much more income someone would get at SPA under the current
system than under the proposed system depends on how many years of
contributions an individual has during their working life. In addition, for anyone
making contributions between 2016 and 2030 (when accruals of S2P will still be
earnings-related under current legislation), it will also depend on the exact level
of their earnings.
Figure 5.1 shows the level of weekly state pension income that an individual born
in 1986 would get at SPA, depending on the number of years of contributions
they make during their working life. Panel A illustrates this for a ‘low earner’ –
that is, someone who earns between the LEL and the LET in every year they are
contributing (or, equivalently, is engaged in some form of S2P-creditable activity)
– while Panel B illustrates this for a ‘high earner’ – that is, someone who earns at
(or above) the UEL in each year that they are in work. There are three important
points to note:
• Regardless of how many years of contributions an individual expects to have,
the current system always delivers a higher income at SPA than the proposed
system would. The difference is larger for high earners than for low earners
in this cohort because the current legislation still provides for some earningsrelated
accrual to S2P up to around 2030.
52 This holds for anyone who had not already accrued 30 years of contributions to the BSP. For
someone who had accrued 30 years of BSP entitlement already, an additional year’s accrual under
the current system would only amount to £1.70 of extra weekly state pension income. These
numbers are slightly different from those that apply to accruals in 2013–14 (£1.75 for S2P)
because of how thresholds are uprated over time with lagged earnings growth / inflation and then
deflated by contemporaneous earnings growth.
53 However, if an individual had already accrued 35 years of contributions to the single-tier
pension, the extra year of contributions would result in no increase in state pension income.
49