The new Single Tier Pension (STP) combines the basic state pension (BSP) and state second pension (S2P) to create a new flat rate pension for individuals reaching state pension age (SPA) from April 2016. The full STP – around £150 per week, £25 below the OECD poverty line – will be payable to each individual with 35 years of NI contributions or credits, with pro rata amounts for shorter records. Derived pensions will be phased out. Existing pensioners and all individuals reaching SPA before April 2016 will be excluded from STP.
Initially the STP will be calculated so that no individual receives less than they would have done under the current system (see Crawford et al. 2014 for details of calculation method). But in the longer run, some will be worse off, mainly those who contributed for longer or whose pay is higher than average. By 2060, the STP will cost 0.4% of GDP pa less than the existing NI scheme.
Among those reaching SPA from 2016-20, 43% (35% of men, 61% of women) will be better off due to either long term self-employment or long periods of caring or disability before 2002. A quarter of the 43% will see an increase of £5+ per week, 13% an increase of £10+, but for some of these the increase will be offset by loss of means-tested benefits (Crawford et al. 2014). This is because the STP amount will be set only just above the threshold for means-tested Pension Credit Guarantee and any shortfall of NI (below 35 years) will bring the STP amount below the threshold.
The close link between STP and Pension Credit level is likely to be maintained in the longer term, so means testing will continue to create a pension poverty trap for those with less than 35 years NI. A small amount of private (occupational or personal) pension or earnings would mean loss of means tested Pension Credit and other means tested benefits. Moreover, with means testing at the level of the household, a member of a couple with a short NI record could be ineligible for means tested benefits due to their partner’s income and would then have a very low personal income.
The STP was meant to encourage individuals to stay in the new auto-enrolled Defined Contribution (DC) workplace pensions (from 2012) by reducing the risk of interaction with means testing in retirement. However, the proportion of individuals who will be affected by the pensions poverty trap remains in doubt. No one can be certain to receive a full STP, nor that their pension saving will be large enough for any loss of means tested benefits to be trivial. Life events affecting employment and earnings, as well as stock market performance affecting the pension fund, are both unpredictable.
In contrast, a Citizen’s Pension would be payable at SPA to every individual with a legal right to residence (a ‘citizen’) and any extra income they earn or have acquired through private pensions would represent a financial gain. Everyone could look forward to income security – at a basic level – in later life. Although Housing Benefit is means tested, other policies such as rent regulation would remove or reduce the necessity for this expensive subsidy to landlords.
The National Pensioners Convention recommend a Citizen’s Pension at least as high as the OECD poverty line (now about £175 per week), funded by NI and payable in full to all, including existing pensioners, who have 30 years residence in the UK (NPC 2014). The tax-funded Dutch and Danish Citizen’s Pensions also depend on years of residence; they have led to low pensioner poverty rates for both women and men.
References
Crawford, R. et al. (2014) A New Single Tier Pension. What does it really mean? IFS Report R82.
National Pensioners Convention (2014) New State Pension. Briefing.
Dr Jay Ginn is a Visiting Professor at Kings College London’s Institute of Gerontology. Her most recent publication is Gender, Pensions and the Lifecourse (Policy Press, 2003).