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These notes refer to the Pensions Bill as introduced in the House of Commons on 28th November 2006 [Bill 12]
1. These explanatory notes relate to the Pensions Bill as introduced in the House of Commons on 28th November 2006. They have been prepared by the Department for Work and Pensions in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
3. This section sets out the current position in each policy area, and how the Bill would change it.
4. Many of the changes listed below are based on policy proposals set out in the Government's White Paper Security in Retirement: Towards a New Pensions System, published in May 2006 (hereafter referred to as 'the White Paper').
5. For ease of reference when reading these explanatory notes, please note the following abbreviations for existing pieces of legislation amended by the Bill:
Bill 12EN 54/2
State Pensions Glossary
6. There are four categories of state pension provided under the SSCBA1992:
7. A Category A pension is contributory. It consists of two parts, either or both of which may be payable:
8. A Category B pension is also contributory. Like a Category A pension, it can consist of either a basic state pension, an additional state pension, or both. It is payable by virtue of a spouse's or civil partner's qualifying years and earnings.
9. A Category D pension is non-contributory. It is payable when a person:
10. See below an explanation of the terms relating to the different earnings limits for the purposes of accruing state pension.
11. LEL - the "lower earnings limit" - currently £84 per week - is the minimum level of weekly earnings on which a person is treated as paying National Insurance contributions for benefit purposes. A person receiving contribution credits or paying flat rate voluntary or self employed contributions is treated as having earnings at the LEL for each weekly credit or contribution. The LEL is currently linked to the standard rate of basic pension. Under the proposed reforms this link will be broken when basic pension starts to be increased in line with average earnings.
12. PT - the "primary threshold" - currently £97 per week - is the minimum level of weekly earnings on which an employed person pays National Insurance contributions. It is the weekly equivalent of the standard personal allowance for Income Tax.
13. UEL - the "upper earnings limit" - currently £645 per week - is the maximum level of weekly earnings on which an employed person pays National Insurance contributions other than at the 1% NHS contribution and under the current scheme accrues state second pension. It is set at approximately seven times the PT (see above). Under the proposed reforms to state second pension the UEL will be replaced by an upper accruals point which will not be linked to the PT.
14. QEF - the "qualifying earnings factor" is the minimum level of earnings on which a person must have paid, been treated as having paid, or been credited with National Insurance contributions in a tax year in order to make it a qualifying year for basic pension - the QEF is currently £4,368 per annum, 52 times the weekly LEL (see above)
15. LET - the "low earnings threshold" - currently £12,500 per annum - relates to state second pension only - it is:
16. The LET is increased annually in line with growth in average earnings.
17. UET - the "upper earnings threshold" - this term relates to state second pension only and is used to refer to the top of the band of earnings over the LET on which state second pension accrues at the 10% rate. The UET is set at 3 times the LET minus two times the QEF - so currently it is (£12,500 x 3) - (£4,368 x 2) = £28,764 which is rounded to £28,800.
State Pensions Measures
Category A and B retirement pensions: single contribution condition
18. Two contribution conditions are required to be satisfied for entitlement to the following benefits:
19. In the case of Category A pension, the contribution conditions apply to the claimant. For the other benefits listed the conditions apply with respect to the claimant's spouse or civil partner (or deceased spouse or civil partner).
20. The first contribution condition is that the relevant insured person must, in any tax year since 6 April 1975, have actually paid Class 1 contributions on earnings of at least 52 times the weekly lower earnings limit for the tax year in question. An equivalent number of Class 2 or Class 3 contributions will also suffice. Alternatively a claimant must have paid 50 flat-rate contributions at any time before 6 April 1975.
21. The second contribution condition is that that person must have achieved a minimum number of "qualifying years" during his working life to be entitled to the full rate of benefit. The minimum number of qualifying years required for a full rate Category A or B basic state pension is currently 44 years for a man and 39 years for a woman. A "qualifying year" is one in which a person's earnings factor for the year is not less than the qualifying earnings factor for that year.
22. For people reaching state pension age (a term interchangeable with 'pensionable age') from 6 April 2010, the policy intention, as set out in Chapter 3 of the White Paper, is to replace the existing contribution conditions for Category A and B pensions with a single contribution condition. The same new condition will apply to the spouse or civil partner of a claimant of a Category B pension where the spouse or civil partner reaches state pension age on or after 6 April 2010 (or dies on or after that date without having reached that age).
23. For people reaching state pension age before 6 April 2010, and for those claiming bereavement benefits (whether before or after 6 April 2010), existing contribution conditions will continue to apply.
24. The core proposal is that, for those reaching state pension age from 6 April 2010, the number of years needed to qualify for a full Category A or B pension is to be reduced from 44 years for a man and 39 years for a woman to 30 qualifying years for men and women alike. A person who has less than 30 qualifying years would be entitled to a proportion of the full basic state pension for each qualifying year they have built up.
Category B retirement pension - removal of restriction on entitlement
25. Currently, in order for a married woman to qualify for a Category B pension based on her husband's contributions:
26. A wife cannot receive her Category B pension until such time as her husband makes a claim for his Category A pension.
27. Where a husband chooses to defer his Category A pension, increments may be added to his wife's Category B pension. She may also have the option of taking a lump sum payment if her Category B pension has been deferred for at least 12 months. However both of these are contingent on her not receiving any Category A pension during the period her Category B pension is deferred (if she does receive Category A pension in this period, she can later receive her Category B pension, but without the increments or lump sum). Thus, a situation may arise in which a wife is required to relinquish entitlement to her Category A pension in order to avoid losing increments or a lump sum payment in respect of her deferred Category B pension.
28. From 2010, Category B pensions will become available to married men and people in civil partnerships on the same basis as they are currently available to married women, where their spouse or civil partner was born on or after 6 April 1950.
29. The Bill removes the restriction on a person's entitlement to a Category B pension that their spouse or civil partner must have made a claim for their Category A pension. The change will have effect from 6 April 2010. As a result, where one member of a married couple or civil partnership has deferred his or her Category A pension and the other member has reached pension age, the other member will have the choice of claiming Category B pension (and where applicable any Category A
pension based on their own contributions) or deferring their Category B pension (and any Category A pension to which they also have title) in order to accrue either increments or a lump sum.
30. As a consequence of other changes made by the Bill, the extent to which people will be reliant on Category B pensions derived from their spouse's or civil partner's contributions would be significantly reduced. However retaining this restriction - even if it were to affect only a small minority of people - would maintain the complexity of the pension system.
Contributions credits for relevant parents and carers
31. Home responsibilities protection has been available for complete tax years since 1978. It helps to protect the basic state pension and certain bereavement benefits 1 of someone precluded from regular employment because they are caring for a child or a sick or disabled person. Home responsibilities protection is not a 'credit'. Instead it works by reducing the number of qualifying years needed for a full basic state pension by up to half of the working life. Home responsibilities protection cannot reduce the number of qualifying years to below 20 for either men or women. From 2010, home responsibilities protection will not be able to reduce the number of qualifying years to below 22 for men. As state pension age equalises for men and women between 2010 and 2020, the limit on the number of qualifying years which can be reduced by home responsibilities protection will increase for women from 20 to 22.
1 Widowed parent's allowance and bereavement allowance
32. Home responsibilities protection is available for complete tax years throughout which someone has been:
33. For example, someone who is awarded home responsibilities protection for 13 years of caring would, as a result, only have to satisfy the second contribution condition (described at paragraph 21 above) for 31 years instead of 44 normally required for a full basic state pension.
34. The proposed new crediting arrangements would allow a parent, a registered foster parent or a carer reaching state pension age from 6 April 2010 to build up, in certain circumstances, entitlement to a Category A basic state pension, and for their spouse or civil partner to build up entitlement to an associated Category B pension. In addition, bereavement allowance and widowed parents' allowance 2, payable to a surviving spouse or civil partner, would be calculated by reference to the new credits in circumstances where the contributor dies on or after 6 April 2010.
2 Bereavement benefits were introduced on 9 April 2001, replacing the previous system of widow's benefits which were only payable to women.
35. For those people reaching state pension age on or after 6 April 2010, each complete year of home responsibilities protection awarded under the existing rules of the scheme will be converted into a qualifying year for basic state pension and relevant bereavement benefits.
Category A and C retirement pensions: abolition of adult dependency increases
36. Adult dependency increases are payable in respect of a 'dependant' who:
37. Adult dependency increases of state pension are currently payable in respect of the following, providing they meet the criteria set out above:
38. As an adult dependency increase in respect of a wife is payable at the same rate as a Category B pension there is no financial advantage in a man continuing to claim an adult dependency increase in respect of his wife once she has attained state pension age.
39. The PA1995 and the CPA2004 provide for women and people in civil partnerships to be eligible for adult dependency increases from 6 April 2010 under the rules which currently apply to men. The PA1995 also provides for the state pension age for women to increase from 60 to 65 between 2010 and 2020.
40. The proposed changes will abolish adult dependency increases with effect from 6 April 2010 and make provision for entitlements up to this date to be protected to 5 April 2020.
Up-rating of basic state pension and other benefits
41. Currently, the basic state pension is required to be uprated annually in line with prices. The Secretary of State is required to consider how this movement should be measured. For contributory benefits, including the basic state pension, up-rating has, in practice, taken place according to the Retail Prices Index. However, in recent years, the Government has given a commitment to uprate by the greater of 2.5 per cent or the Retail Prices Index. Since giving this commitment the Retail Prices Index has always been higher.
42. From the time state pension credit was introduced in October 2003, the Secretary of State has uprated the standard minimum guarantee annually in line with earnings, in reliance on a discretionary power in the existing legislation. There is currently no mandatory requirement to uprate the standard minimum guarantee in state pension credit.
43. The lower earnings limit, currently £84 per week (equating to an annual qualifying earnings factor of £4,368), is the earnings point at which employees start to build up entitlement to contributory working age and pension benefits, by treating an individual as if they have paid National Insurance contributions. National Insurance contributions do not actually become payable until an individual has earnings at or above the primary threshold, currently £97 a week, or £5,044 per annum. At present, the amount of the lower earnings limit increases in line with prices, because it is linked to the weekly rate of Category A basic state pension.
44. Similarly, the rate of the basic allowance in widowed mother's allowance, widow's pension, widowed parent's allowance and bereavement allowance also increases in line with prices because they are linked to the rate of Category A basic state pension. The higher permanent rate of the widow's pension and widower's pension in Industrial Death Benefit has also historically been the same as the rate of Category A basic state pension.
45. The proposals will require the basic state pension to be uprated annually in line with earnings rather than prices, and would cover the up-rating of Category A, Category B, Category C and Category D pensions.
46. The Government stated in the White Paper:
47. The proposals will also require the standard minimum guarantee in state pension credit to be uprated annually in line with earnings.
48. In addition, the proposals will break the link between the amount of the lower earnings limit and the weekly rate of the basic state pension in a Category A pension. This will mean that the amount of the lower earnings limit will not automatically increase in line with earnings in the future. Instead, any future increase in the lower earnings limit will be at the discretion of the Treasury.
49. The proposals in the Bill will ensure that the rate of the basic allowance in widowed mother's allowance, widow's pension, widowed parent's allowance and bereavement allowance will continue to be uprated in line with prices, like other pre-retirement benefits. However, the proposals will ensure that the rate of widow's pension and widower's pension in industrial death benefit will be uprated in line with earnings to maintain the link with the rate of Category A pensions.
Deemed earnings factors for purposes of additional pension
50. The state second pension was introduced in 2002. It replaced the state earnings related pension scheme to provide a more generous additional state pension for:
51. In addition, those entitled to severe disablement allowance or long-term incapacity benefit must satisfy a labour market attachment condition when they reach state pension age. This condition requires that they have worked and paid Class 1 National Insurance contributions for at least one tenth of their working life since 1978.
52. Carers and disabled people in these groups are treated as if they have earnings at the qualifying earnings factor (52 times the lower earnings limit) and, along with employed earners who have earnings at the lower earnings limit but below the low earnings threshold, are also boosted to (i.e. deemed to be earning at) the low earnings threshold 3. In other words, these groups are treated as having Band 1 earnings for the purposes of calculating entitlement to state second pension for a given tax year.
3 £12,500 per annum in 2006/2007
53. Employed earners with earnings above the low earnings threshold would accrue state second pension according to their band of earnings.
54. The proposed changes would increase the number of people who are deemed to be earning at the low earnings threshold, and so accruing state second pension as if they had Band 1 earnings until the proposed new simplified state second pension is introduced.
55. The changes allow persons to be deemed to be earning at the low earnings threshold for a tax year starting with that commencing 6 April 2010, if they satisfy any of 3 conditions:
56. The new earnings credits, of 1/52 of the qualifying earnings factor for the year are available in respect of each week in which a person was:
57. People earning at or above the low earnings threshold will continue to accrue state second pension according to the band of earnings they are in until the new simplified state second pension is introduced (see paragraphs 58 - 63 below).
Additional pension: simplification of accrual rates
58. Paragraphs 60 - 63 detail how state second pension is to be accrued. In broad terms, for any given tax year, state second pension accrues on the portion of an employee's annual earnings between the annual value of the lower earnings limit and the upper earnings limit for Class 1 National Insurance contributions - called the "surplus earnings factor". This amount is revalued in line with growth in average earnings up to the last full tax year of a contributor's working life. The accumulated surplus earnings factors are then divided by the number of years in the person's working life to produce a "lifetime average" which is multiplied by the relevant accrual rate and divided by 52 to produce a weekly rate of additional pension.
59. People earning, or treated as earning, between the lower earnings limit and the upper earnings limit accrue state second pension on a cumulative basis depending on the level of their earnings. Earnings above the upper earnings limit do not accrue state second pension. The table below sets out the current earnings accrual bands for state second pension that will apply from 2009/2010.
|© Parliamentary copyright 2006||Prepared: 29 November 2006|