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591. In Chapter 6 of the 2002 Green Paper: Simplicity, security and choice: Working and saving for retirement (Cm 5677) the Government included proposals for amending the arragements for those who defer their state pension, by:
592. There is no change planned to the rule on electing to cancel entitlement - as now, a person will be able to do this once only.
593. The intention is now to advance the commencement date of the deferral changes to April 2005.
Increments and removal of time limits
594. Clause 221 amends the Pensions Act 1995 Act to bring forward the commencement date of the 2010 changes to April 2005. No other substantive changes to the structure or calculation of increments are proposed.
The lump sum - general conditions
595. The lump sum will be an option only after a person has deferred for at least 12 months (in contrast to increments, which, following the change in accrual rate, will be payable after five weeks' deferment). However, as with increments, there will be no upper limit on the length of time a person may defer and accrue a lump sum.
596. It is intended that the lump sum will comprise the pension a person would have been entitled to had they not deferred, plus a rate of return that will be applied weekly and compounded. The pension forgone will be calculated at the rate that would have been applicable in each week (or "accrual period") for which the person defers.
Married couples and provisions for widows/ widowers
597. Both members of a married couple may defer their pension entitlement, either by deferring their own individual Category A pension, or as a consequence of the spouse, from whose contributions the other partner's pension is derived, deferring his. Each member of the couple will have the choice of either increments or (providing the deferment period is at least 12 months) a lump sum, in respect of their deferred pension. So, for example, a woman may prefer an increase to her weekly pension, while her husband elects to receive a lump sum.
598. If a deferrer dies before claiming it is intended that his surviving spouse will be able to choose to "inherit" either a lump sum or increments based on the deceased's deferred entitlement. This choice will only be available if the person had deferred for at least 12 months. In all other respects, the conditions for "inheriting" a lump sum will be the same as for inheriting increments, that is, that the survivor was married to the deceased at the time of death, has attained state pension age and has claimed their own pension.
599. Should the death occur before the spouse has attained state pension age, the value of the lump sum as nominally accrued at the date of the deferrer's death will be maintained in line with prices up to the point at which the surviving spouse claims his or her pension. The value of increments earned by a deceased partner is currently protected in a similar way.
600. The calculation of the lump sum for survivors will reflect the proportion of increments that can be inherited; that is, 100 per cent. of the lump sum derived from the basic Category A pension, a proportion of the lump sum derived from the additional pension and one-half from deferred Graduated Retirement benefit.
601. In order to maintain consistency with the existing rule relating to the inheritability of increments, before April 2010 a widower's entitlement to an inheritable lump sum will be restricted to cases where the widower is himself over pension age at the time his wife dies.
Provisions of clause 221
602. Subsection (1) substitutes section 55 of the Social Security Contributions and Benefits Act 1992 to reflect the introduction of the choice between a lump sum and increments in Schedule 5.
603. The substituted section 55(3) replicates the current section 55(2) and defines when a person's entitlement to their Category A or B pension is deemed to be deferred, that is,
604. Subsection (2) substitutes section 55C of that Act, which makes provision for increments where shared additional pension is deferred. The new section 55C(1) and (2) introduce a new Schedule 5A which provides for increments or a lump sum to be accrued on deferred shared additional pension (see commentary on Schedule 10 to this Bill for the detailed explanation of these provisions).
605. Section 55C(3) replicates the current wording of section 55C(1) which defines when entitlement to a shared additional pension is deferred (that is, where entitlement to Category A or B retirement pension is deferred and the person is not entitled to shared additional pension only because they have not made a claim for it).
606. Subsection (3) amends Schedule 4 to the Pensions Act 1995 so as to bring forward from 2010 to 2005 the operative date for the increase in the rate at which increments accrue where a person defers their entitlement to a state retirement pension or a shared additional pension. This subsection also removes the time limits which currently operate to restrict a person's right to defer their retirement pension.
607. Subsection (4) introduces Schedule 10 to this Act which amends Schedule 5 to the Contributions and Benefits Act and related enactments.
Schedule 10 - Deferral of retirement pensions and shared additional pensions
608. Paragraph 4 inserts a new paragraph A1 at the beginning of Schedule 5 to the Social Security Contributions and Benefits Act 1992. This requires a person who has deferred their Category A or B pension for at least 12 months to choose between increments or a lump sum when they claim their pension. As this choice is not available for those who defer for shorter periods, this provision also effectively sets a minimum qualification period of 12 months for the lump sum.
609. Regulations made under this paragraph will prescribe how the election is to be notified and the period within which the choice must be made. If no choice is made within the prescribed period however, a person will be deemed to have chosen the lump sum (paragraph A1(2)). In other areas of social security legislation where potential entitlement to more than one benefit exists, the Secretary of State has the power to make the decision which is most advantageous for the claimant. In this instance, we recognise that for many people, a weekly increase to their pension would, over time, be financially more beneficial; however the lump sum is the "safe" alternative, as it carries no actuarial risk.
610. Regulations made under paragraph A1(3) will set out when a person may reverse the election (or deemed election); the intention will be to provide only a limited easement, on the basis that once the choice is made, it should normally be regarded as binding.
611. Paragraph A1(4) provides that where a person's deferred pension includes increments inherited from a deceased spouse in respect of deferred Guaranteed Minimum Pension (GMP) under paragraphs 5 to 6 of Schedule 5, a person is not able to choose between increments and a lump sum for that component of their deferred pension. The intention is that only increments for that element may be awarded, because pension schemes will not be required to change their rules to offer lump sums as an alternative to increments for deferred GMPs.
612. Paragraph 5 substitutes paragraph 1 of Schedule 5. The new paragraph 1(1) provides that increments will be added to the pension where the person has either deferred for less than 12 months or has deferred for longer but has chosen increments rather than the lump sum.
613. The new paragraph 1(2) carries forward the existing wording of the current paragraph 1. In conjunction with the increase in the incremental rate to 1/5th of one per cent for each incremental period provided for in paragraph 2(3) of Schedule 5 (see in relation to clause 221(3) above), this sub-paragraph provides a minimum deferral period of five weeks for increments by providing that no increase is payable if the increment would be less than one per cent.
614. Paragraph 6 corrects an omission in the current legislation. For the purposes of calculating increments, the intention is that additions to the pension for a dependent husband or wife under sections 83 and 84 of the Contributions and Benefits Act are excluded. As drafted, however, paragraph 2(5)(b) of Schedule 5 only excludes additions under section 83 (paid to a husband for his wife). From April 2010, both sections are replaced by section 83A which equalises the provision of additions for dependent spouses. Paragraph 6(1) therefore substitutes a reference to section 83 with a reference to section 83A; paragraph 6(2) provides that until section 83A comes into effect in 2010, it is to be read as a reference to sections 83 and 84.
615. Paragraph 7 inserts a new sub-paragraph 2A, to provide for the calculation of the increase to the weekly pension that will be applicable where a person has elected a lump sum but their deferred pension includes inheritable GMP increments (see note to paragraph A1(4) above). The increment is to be calculated on that component of the deferred weekly pension alone (the rest being converted to a lump sum).
616. Paragraph 8(1) inserts new paragraphs 3A and 3B into Schedule 5.
617. Paragraph 3A provides that a person is entitled to a lump sum if they have both deferred entitlement to their state retirement pension and have elected to receive a lump sum under paragraph A1(1)(b) (or are treated as having made such an election) having deferred their entitlement to their pension for at least 12 months.
618. Paragraph 3B sets out how the lump sum is to be calculated. This is modelled on the same principle as an interest-earning savings account: "interest" will be applied each week to the amount "saved", and compounded.
619. The weekly amount to which the rate of return will be applied is the amount of pension that the person would have been entitled to had they not deferred (subject to paragraph 3B(4), see below). Retirement pension is payable weekly in advance from the first benefit payday that coincides with, or follows, the date the person is first entitled to the pension. So for example, if a person reaches pensionable age on, say, a Thursday and their pension payday is a Monday, they will not be entitled to any payment for the days preceding that first Monday. At the other end of the claim however, if they cease to be entitled to the pension on for example, a Wednesday, their pension continues in payment to the end of that benefit week.
620. In order to capture accurately the amount of state retirement pension forgone therefore, the definition of "accrual period" will mirror the provisions which determine what constitutes a person's benefit week, and effectively provide that each benefit week which begins in the deferment period will be a week that counts for the lump sum calculation. This means that days in the period of deferment which precede the first notional payday will be excluded, but days which fall between the end of the deferment period (i.e. the date the pension claim is actually made) and the first date for which weekly pension becomes due will be included.
621. For the purposes of the calculation, the amount of weekly pension forgone includes an invalidity addition 3 but excludes increases for a dependent adult or child or any Graduated Retirement Benefit (see below in relation to paragraph 17 of the Schedule). It also includes any increments inherited by the deferrer from a deceased spouse. This corresponds to the definition of "weekly benefit" as used as the basis for the calculation of increments.
3 An invalidity addition is an increase added to a person's Category A pension where they were entitled to an age-related addition to their Incapacity Benefit on any day within the eight week period before they reach state pension age. The addition may be extinguished under certain circumstances: paragraph 3B(5) provides that these circumstances are to be ignored for the purposes of the lump sum calculation.
622. However, where the deceased spouse has been entitled to increments from deferring their GMP, the increments (and uprating of those increments) inheritable under paragraphs 5 to 6 of Schedule 5 will not form part of the weekly pension forgone for the purpose of the lump sum calculation, but will instead continue to be included as an increase to the weekly pension (cf. note to new paragraph 2A, above).
623. Regulations made under paragraph 3B(4)(b)(iii) will provide for the amount of lump sum to be adjusted to take account of circumstances in which pension would have been reduced had the person been claiming at the time (for example, if another benefit which overlaps with retirement pension had been in payment, or the person had been in prison).
624. The percentage rate that is to apply will be prescribed by affirmative regulations (see paragraph 19 of the Schedule). The formula at paragraph 3B(3) applies the 52nd root of this figure to the amount accrued, to provide a compounded rate which at the end of a period of 52 weeks will equal the prescribed percentage rate.
625. The following example demonstrates how the formula is intended to be applied. The weekly pension rates and rate of return shown here are to be read as illustrative only.
626. Paragraph 8(2) makes the same provision regarding the exclusion of dependency additions under sections 83 and 84 of the Contributions and Benefits Act before April 2010 for the purposes of calculating the lump sum as made by paragraph 6 above in respect of increments.
627. Paragraph 9 inserts a new paragraph 3C into Schedule 5. This allows the surviving spouse of a deferrer who has died whilst deferring his pension (having deferred for at least 12 months) to be able to choose between "inheriting" increments or a lump sum in respect of his deferment. This choice is only to be exercised when the widow/er is claiming his or her own pension: if the deferrer dies when the spouse is still under state pension age, the amount of increments or lump sum which would have been awarded had the spouse been entitled to his or her pension at the time the deferrer died will be increased to reflect price increases in the period between the deferrer's death and the date the survivor claims his or her pension. (This provision already exists for increments; the equivalent provision for lump sums is made by new paragraph 7B(6) as inserted by paragraph 11 of this Schedule, and by the amendment to section 150 of the Social Security Administration Act 1992, as inserted by paragraphs 20 to 22 of this Schedule).
628. Paragraph 3C(3) and (4) make provisions corresponding to those at paragraph A1(2) and (3) deeming the lump sum to be the surviving spouse's choice if no election is made within the prescribed time limit, and allowing the election to be changed in prescribed circumstances.
629. Paragraph 3C(5) provides that where the deceased was, or would have been, entitled to increments from deferred GMP, the surviving spouse will "inherit" an increase to the weekly pension in respect of that element, regardless of what election is made in relation to the rest of the deceased's deferred entitlement.
630. Paragraph 10 amends the existing paragraph 4 of Schedule 5 to provide that a surviving spouse will be entitled to inherit increments, either where increments were already in payment to the deceased when he died, or where this is the widow/er's preferred option, or where the deceased had deferred for less than 12 months. The provisions relating to the actual amount of increments the surviving spouse inherits are not amended by this Bill and are therefore not described here.
631. Paragraph 11 inserts new paragraphs 7A and 7B into Schedule 5 which largely replicate paragraphs 3A and 3B in respect of the calculation of the lump sum for a widowed person.
632. The only difference between the two calculations is that the amount of additional pension forgone will be adjusted to reflect the proportion of that pension component which the surviving spouse is entitled to inherit as part of her weekly pension. Paragraph 7B(3) shows the proportion as one-half. This would be modified in respect of additional pension that is derived from SERPS, by the Inherited SERPS regulations 4, made under section 52(2) of the Welfare Reform and Pensions Act 1999. Paragraph 25 of this Schedule amends section 52(2) so that those regulations may be amended to include references to the lump sum. This will enable the reduction in the inheritable proportion of the additional pension component of the lump sum to be phased in by October 2010, in line with the corresponding changes to inheritable SERPS itself.
4 The Social Security (Inherited SERPS) Regulations 2001 (S.I.2001/1085)
633. Paragraph 12 provides that the final amount of the lump sum will be rounded to the nearest whole penny and that in exercising the power to prescribe the interest rate, the Secretary of State must have regard to the national economic situation and to any other matters which he considers relevant.
634. Paragraph 14 makes consequential amendments to paragraph 8 of Schedule 5 to include references to the lump sum calculation. In particular, new sub-paragraphs (4) to (6) substitute the existing paragraph 8(4) which prevents increments being inheritable by a surviving spouse in respect of deferred pension that was either wholly or partly based on the survivor's own contributions (i.e. it was either a Category B pension or a Category A pension that was increased by virtue of the spouse's contributory record). This provision is now extended to refer to the calculation of lump sums.
635. Paragraph 15 inserts a new Schedule 5A into the Contributions and Benefits Act to provide the choice between a lump sum or pension increase where a person has deferred their shared additional pension and how that lump sum or increase is to be calculated.
636. Paragraphs 1, 2, 4 and 5 of the new Schedule 5A largely replicate the provisions made under paragraphs A1, 1, 3A and 3B of the amended Schedule 5 with respect to elections between increments and a lump sum, and the calculation of the lump sum. Paragraph 3 replaces the existing provisions in section 55C of that Act relating to the calculation of increments where shared additional pension is deferred, incorporating the changes to those provisions made under section 50(2) of the Welfare Reform and Pensions Act 1999 to take effect from 2010 and now brought forward.
637. The only significant difference between the lump sum for Category A or B pension and the lump sum for shared additional pension is that, in line with the current provisions on shared additional pension increments, if the person entitled to that pension has subsequently remarried and dies leaving a widow or widower, the surviving partner will not be entitled to inherit the lump sum.
638. Paragraph 17 amends section 62(1) of the Contributions and Benefits Act so that where entitlement to Graduated Retirement Benefit has been deferred, regulations may provide for the choice between a lump sum or increments for the deferment period.
639. Paragraph 18 amends section 122(1) of that Act to extend the definition of "deferred" and "period of deferment" for the purposes of that Act to cover deferment of shared additional pensions.
640. Paragraph 19 amends section 176 of that Act to provide that regulations prescribing the percentage rate applicable to the lump sum calculation shall be made by the affirmative procedure.
641. Paragraphs 20 to 22 allow a lump sum to be uprated where a surviving spouse has not attained pensionable age when his or her spouse died and is therefore not yet entitled to their own state retirement pension (cf. notes to paragraph 9, above).
642. Paragraph 24 omits section 50(2) of the Welfare Reform and Pensions Act 1999 which increased the rate at which increments accrue and removed the time limits for accrual in shared additional pension from 2010: these changes are now subsumed within the new Schedule 5A, as enacted by this Schedule.
643. Paragraph 25 enables the modifications to the Inherited SERPS provisions to be extended to the calculation of the lump sum for surviving spouses (see under paragraph 11, above).
644. Paragraph 26 restricts a widower from inheriting a lump sum or increments where he attains pensionable age before 6th April 2010 unless he himself was over that age when his wife died. This re-enacts and extends the corresponding provision made by paragraph 21(14) of Schedule 4 to the Pensions Act 1995 which applied in relation to entitlement to increments under the previous version of paragraph 4(1) of Schedule 5 to the Contributions and Benefits Act, and which is now substituted by paragraph 10(2) of this Schedule.
645. Paragraph 27 provides a power to make regulations detailing the transitional arrangements that will apply in cases where a period of deferment spans 6 April 2005, the commencement date of these changes.
646. In particular, it is intended that regulations made under this power will provide that any period of deferment that wholly precedes the commencement date will be subject to existing rules. That is, in respect of any such period, only increments at the current rate may be awarded. For the period beginning on the commencement date, the new provisions will apply so that, providing the part of the deferment period starting on the commencement date lasts for at least 12 months, the deferrer will have the choice of a lump sum or increments at the new rate. Corresponding provisions will be made in respect of a surviving spouse's entitlement to inheritable increments or a lump sum.
647. These clauses and schedule, which make further provision in respect of deferred retirement pension or deferred shared additional pension and, in particular, introduce the option of a lump sum, involved consideration of Article 1 of Protocol 1 and Article 14 ECHR. Insofar as these Articles may be engaged it is considered that the further provisions for deferral are justifiable.
Clause 222 - Disclosure of state pension information
648. This clause amends section 42 of the Child Support, Pensions and Social Security Act 2000 to allow state pension information to be disclosed to agents, third party administrators and others providing certain services to trustees, managers and employers in relation to pension schemes as well as to the trustees, managers or employers themselves. State pension information may be disclosed by the Secretary of State to such persons if the procedures set out in section 42(4)(b) and (5) and the regulations made under them are followed.
649. Section 42(3A) as inserted will more easily allow scheme members to be given a combined pension forecast where advice or forecasts are provided by third parties to the pension scheme managers or trustees rather than being produced by pension scheme managers or trustees themselves. The lack of reference to such third parties in the existing legislation has limited the number of pension schemes able to provide combined pension forecasts because it has prevented the supply of state pension information by the Secretary of State. (See also Part 4 of this Bill).
650. Subsection (4) inserts a reference in section 42(7) to projections of any lump sum to which a person may be entitled. Subsection (5) amends section 42(11) to include lump sums in the definition of state pension information and to include shared additional pension and graduated retirement benefit in the definition of additional retirement pension.
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