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

A single-tier pension: what does it really mean?
through retirement than combined BSP and S2P income is. Therefore, when
comparing the two systems, it is important to consider the entire stream of
pension income that an individual would receive throughout their retirement,
rather than just the income at SPA.
Figure 5.2 shows how weekly pension income would evolve during retirement,
for someone born in 1986 with 20, 35 or 49 years of contributions to the state
pension system; this is the same example ‘low earner’ shown in Panel A of Figure
5.1. The 35-year contribution history corresponds to the example of Jeff
described in Box 5.1.
Figure 5.2. How state pension income evolves during retirement under
the current and proposed systems: low earners aged 16 in 2002–03
Weekly pension income
(£; 2013–14 earnings terms)
200
180
160
140
120
100
80
68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 102 104 106 108
Note: This graph is for someone contracted in, aged 16 in 2002–03, who works continuously from
2002–03 and earns between the LEL and the LET in every year they are in work (or, equivalently,
is engaged in some form of S2P-creditable activity). Someone with 35 years of contributions is
assumed to make contributions between the ages of 20 and 54 inclusive, and someone with 20
years of contributions is assumed to make them between the ages of 20 and 39 inclusive. The level
of the BSP is assumed to increase with the triple lock until April 2015 and then with average
earnings growth thereafter, whereas the value of the single-tier pension is assumed to be £146.30
in 2013–14 earnings terms and uprated with average earnings growth after 2016.
Source: Authors’ calculations.
Under the proposed system, any individual born in 1986 who accrues at least 35
years of contributions towards the single-tier pension will receive £146.30 per
week from SPA (age 68) onwards. This figure remains constant in earnings terms,
reflecting the fact that the level of the single-tier pension will be increased each
year in line with growth in average earnings.
By contrast, pension income under the current system would decline through
retirement. This is because, though the BSP is indexed to average earnings, the
S2P element is only indexed to prices. Therefore, Jeff – with 35 years of credits to
BSP and S2P – would receive more income at SPA under the current system than
under the proposed system (£166.52 per week, rather than £146.30 per week).
However, this income will decline over time relative to average earnings, and so
52
Current rules (49 years of contributions)
Current rules (35 years of contributions)
Single-tier pension (35+ years of contributions)
Current rules (20 years of contributions)
Single-tier pension (20 years of contributions)
Age