The long awaited White Paper was released
on 25 May. It contains many proposals which
would change the pensions system quite radically.
Amongst its features are the following:
A new low cost savings scheme through
personal accounts in which employees will
be automatically enrolled unless they are
members of their employer's scheme which
meets a minimum standard. Employers will
be required to make matching contributions
while the employee chooses to remain in
that new scheme. It is thought that up
to 10 million employees will 'choose' not
to opt out.
Employees will contribute 4%
of a band of earnings between approximately £5,000
pa and £33,000 pa. Employers will
pay 3% on the same band of earnings and
a further 1% will be added from the employees
basic rate tax relief (some employees will,
of course, attract higher rate tax relief
too).
There will be measures to help smooth
the introduction of this reform for
business. Employers’ contributions
will be phased in over three years at
the rate of 1% each year. There will
be consultation on additional transitional
support for very small businesses.
Non
employees and the self-employed will
be able to opt in to the personal
accounts scheme.
A higher state pension
re-linked to earnings from 2012 but
only if it can be afforded at that time.
A statement on the precise date of implementation
will be made 'at the start of the next
parliament'.
The state second pension will
become a simple and flat rate top-up
to the basic pension. This process will
start at the same time as basic pension
earnings linked increases (ie, 2012 or
later) and be fully flat rate by 2030
or shortly after.
There will be a gradual
rise in the state pension age. It will
rise to 66 over two years between 2024
and 2026 and then from 66 to 67 between
2034 and 2036 and then to 68 in 2044
to 2046. Of course, this will also increase
the number of years for which national
insurance contributions have to be
paid, even if not needed to earn a full
state pension (see below).
There is an extension
of the current anomaly whereby benefits
can be earned for no financial contribution.
The White Paper suggests modernising the
contributory principle for the basic state
pension and the state second pension so
that ‘it rewards
social contributions equally with paid contributions’.
This will be done by cutting to 30 the number
of qualifying years needed to receive a full
basic state pension, replacing Home Responsibilities
Protection with a new weekly credit for those
caring for children, and introducing a new
contributory credit for those caring for
severely disabled people for 20 hours or
more per week.
