5 Further improvements which need
to be built into the new system |
National Insurance issues
104. The number of years required to obtain a full
State Pension will increase from 30 years under the current system
to 35 years under the STP. This means that it is even more important
that people understand what they need to do to obtain a full NI
record, either through National Insurance Contributions (NICs)
paid or NI credits awarded.
NI CREDITING ARRANGEMENTS
105. Under the current system, people in a range
of circumstances, including those with caring responsibilities
or those who are unemployed, on benefits and looking for work,
can be awarded NI credits which maintain their NI record and count
towards the Basic State Pension (and may also count towards the
Additional State Pension, depending on the "class" of
106. The current system of credits is very complex:
the White Paper highlights that "HMRC and DWP operate a system
of National Insurance credits which apply to over 21 different
circumstances from being a carer to serving as a member of a jury".
The Government says that: "Crediting arrangements will be
brought forward to protect the single-tier pension position of
those who cannot work, with the implementation of the single-tier
pension potentially providing an opportunity to simplify recording
and operating systems". However, the details of how crediting
will work are not made clear in the White Paper or draft Bill.
107. Sally West of Age UK believed that information
about the availability of NI credits was a critical area.
Emily Holzhausen of Carers UK highlighted that claiming the carers
credit is a cumbersome process and believed that more information
should be made available to carers, particularly through government
advice services, to make them aware of when they needed to apply
for credits rather than receiving them automatically.
108. Both the PPI and Baroness Hollis emphasised
the need for clarity on what would count towards NI credits under
the new system.
Baroness Hollis highlighted that "women's working lives are
infinitely more volatile than men's" because of the caring
responsibilities so many of them had for children and/or parents.
She believed that the STP would "transform the situation
for low-paid women or women who are in and out of the labour market"
but only if "there are adequate and appropriate credits and
The importance of ensuring that women were aware of the implications
for NI credits of the changes to child benefit entitlement was
109. The Minister stressed that the Government was
keen to address problems with NI credits because "we want
people to claim them". He highlighted that HM Revenue &
Customs (HMRC) send out "deficiency notices" to anyone
who does not have a full NI record for a particular year. At the
moment, these notices do not flag up to people that they can claim
NI credits, for example if they are not working because they have
caring responsibilities. He believed that it would be possible
to improve the information which HMRC sends out, to help people
to understand when they needed to claim NI credits and the process
for doing so.
He also pointed to two further improvements: the STP would simplify
the two different NI crediting systems which had operated for
BSP and ASP; and the new Universal Credit working-age benefit
to be introduced from April 2013 would "expand the scope
VOLUNTARY NATIONAL INSURANCE CONTRIBUTIONS (VNICS)
110. People who have incomplete NI records, or who
are unlikely to meet either the minimum number of qualifying years,
or the 35 years necessary for full STP entitlement, may wish to
make voluntary National Insurance Contributions (VNICs) to build
up their NI record. Age UK believed that individuals would need
help to decide whether it was worthwhile for them to do this.
111. The Minister highlighted that HMRC had laid
new Regulations in February 2013 which will extend the period
over which people can buy VNICs. This is intended to reflect the
uncertainty about NI contributions which people may have around
the implementation date for the STP, and allow them time to assess
whether they need to take action to build up their NI record.
The Explanatory Memorandum to the Regulations sets out that, in
the period before the STP is implemented, DWP "may not be
able to provide State Pension Statements that give accurate estimates
of Single-tier Pension to those who reach State Pension age on
or after 6 April 2017. This uncertainty may make the decision
whether to pay voluntary contributions more difficult." To
ensure that people who may be affected are not disadvantaged,
the time limits for paying voluntary NICs for the 2006-07 to 2015-16
tax years inclusive will be extended until 2023. It will be possible
to buy VNICs for these years at 2012-13 rates until April 2019.
112. A number of individuals, the majority of whom
are women, have multiple part-time, low-paid jobs from which they
earn too little to take them above the National Insurance Lower
Earnings Limit (LELcurrently £5, 564 a year) for NI
contributions. The TUC said that the requirement to reach the
LEL "prevents many low earners, predominantly women, from
accruing state pension entitlements."
113. Age UK pointed out that 16 hours a week at the
national minimum wage would leave individuals below the LEL and
that "you could have three jobs earning £100 per week,
and you are still not getting a [NI] contribution that gives you
a right towards a pension." Ros Altmann highlighted that
DWP had said that "very few" people were in this position
but believed that it was important for this to be quantified.
She pointed out that women who were working in multiple low-paid
jobs of this kind could actually be in a worse position in terms
of their NI record than someone who was not working at all but
who was entitled to credits.
Baroness Hollis believed that the introduction of Universal Credit
and the accompanied use of Real-time Information on PAYE taxation
would make it easier to amalgamate information on earnings for
women with jobs below the LEL and help ensure that they built
up an NI record.
114. The Minister accepted that this was an issue
for some people, mainly women, but believed that it affected a
relatively small number. He estimated that there were about 65,000
women with multiple jobs below the LEL and suggested that "about
three-quarters" were receiving NI credits, for example because
they had children under 11, or they were carers.
DWP subsequently provided further written evidence which showed
that 25,000 of these 65,000 women were not receiving credits.
Of these, 15,000 had earnings which, if combined, would taken
them over the LEL. Around 5,000 men were in the same position.
115. The Minister highlighted that National Insurance
is assessed per job, not by aggregated earned income from multiple
jobs and believed it would be very complex to try to change the
current system, particularly given the very small number of people
affected. However, this was another area in which the introduction
of Universal Credit might further reduce the scale of the problem.
116. Following the evidence session, the Minister
provided further details about how NI crediting arrangements would
change under Universal Credit. Claimants who would not have received
NI credits from existing benefits will be automatically credited
under Universal Credit. These include Housing Benefit claimants
earning below the Lower Earnings Limit and carers on Income Support,
who are currently required to make special applications to receive
credits. In addition, as Universal Credit will be paid to the
household rather than an individual, both partners will receive
the NI credit if they are eligible. The Minister highlights that
this will benefit "non-working partners of people in low-paid
jobs who would not receive a credit from any other source under
the current system". The Department expects to lay the Regulations
relating to the crediting arrangements for Universal Credit shortly.
117. It is important
that people are given the opportunity to build up a full entitlement
to a State Pension, given that the number of qualifying years
required for this will increase from 30 to 35. We welcome the
Government's willingness to look at how the system of National
Insurance credits might be improved, by providing more prompts
to people who have incomplete records to take up credits if they
are carers or are in other circumstances which give them a crediting
entitlement. However, any system which relies on individuals being
aware of this facility is likely to exclude many of the people
it is intended to help. We are pleased that the Government plans
to use the introduction of Universal Credit to widen the scope
of the NI crediting system for people claiming benefits and to
more fully automate it.
in multiple low-paid jobs which all fall below the Lower Earnings
Limit do not currently build up a National Insurance record. We
accept the Minister's assurance that many of these people, mainly
women, often receive NI credits because they meet the relevant
criteria. However, DWP estimates that around 20,000 people in
this situation do not receive NI credits or make NI contributions.
We support the Government's changes under Universal Credit which
will mean that many multi-job low-earners are brought within the
scope of NI credits, including through the new facility for both
partners to receive credits on the basis of a household entitlement
to Universal Credit. This is particularly important as the facility
to derive State Pension entitlement through a spouse or partner's
NI contributions will no longer exist under the STP.
119. We welcome
HM Revenue & Customs' acknowledgement that people will require
additional time to assess their need to make voluntary National
Insurance Contributions (VNICs) around the time of the introduction
of the STP, particularly as the implementation date has now been
brought forward by a year. The usual six-year period during which
it is normally possible to make voluntary NICs has been extended
so that VNICs for the years 2006-07 to 2015-16 can be made at
any time up to April 2023. We regard this as a very sensible measure
which will be of considerable assistance to many people. However,
people will need help to understand the implications of the transition
to the STP, and many may not immediately appreciate the need to
build up more years in their NI record under the new system and
in their own right. We therefore recommend that the DWP communications
strategy for the STP includes specific provision for a joint campaign
with HMRC to publicise this extended opportunity to build up a
full NI record.
120. Self-employed people are one of the key groups
to benefit from the STP as they will be brought fully into the
State Pension under the new system and are therefore more likely
to receive a higher amount. Under the current system, National
Insurance Contributions paid by the self-employed do not count
towards Additional State Pension.
However, self-employed people in general currently pay lower NICs
than employed people.
121. Paul Johnson of the IFS argued that "the
current way of treating the self-employed for National Insurance
is a huge open invitation to tax avoidance, because it is so much
lower than you pay as an employee". He believed that the
STP "may offer an opportunity to close the gap".
122. The IoD, whose members include many self-employed
people, said that even the most reluctant "would recognise
that, given the improvements we are going to get going forward
[from the STP], it is possibly only fair that everybody should
be asked to do their little extra bit" in terms of paying
the same NICs as employed people.
Baroness Hollis agreed that the self-employed should be paying
the same as employees but highlighted that self-employment "is
not a continuous curve" and that people at one end of the
scale often cycled between employment, self-employment and no
123. The Minister said that he was not aware of any
Government plans to change the NI contribution rate for self-employed
people. This was confirmed in the Budget 2013 which said that
"everyone except the self-employed will pay the same rates
of NICs from 2016-17".
The Minister pointed out that the self-employed "are not
in the scope of automatic enrolment" and that they have therefore
"always been a problem for pensions policy". He highlighted
that low-earning self-employed people actually pay more NI than
low-earning waged people do.
people are one of the key groups to benefit from the introduction
of the Single-tier Pension, as they will be brought fully into
the State Pension system. We recognise the principle that this
might mean they should pay the equivalent in National Insurance
Contributions that employed people will pay. However, we believe
that this change should be considered as part of a wider review
of how National Insurance could now be simplified.
Setting and maintaining the differential
between STP and Pension Credit
125. The Government has made clear that the full
rate of the STP will be set above the basic level of means-tested
support (the Pension Credit Standard Minimum Guarantee) because
"this will help clarify the incentive to save privately for
White Paper says that "for illustrative purposes", the
assumed starting level for the STP will be around £144 a
week (in 2012/13 prices), which is just above the current rate
of the Pension Credit guarantee.
Dr Altmann believed that "the logic of having it just above
the means-tested Pension Credit threshold is sound".
126. Age UK supports the single-tier reforms but
believes that the level of the STP "needs to be set at a
level that tackles poverty, reduces reliance on means-testing,
and provides a decent platform for saving". It questions
whether £144 per week is enough to achieve this. It points
out that the figure used in the Green Paper of £140 per week
was £7.40 above the Guarantee Credit figure at the time whereas
£144 is only £1.30 above the current level. 
Sally West said:
[...] the level needs to be sufficient to take people
above meanstested benefits, and act as a platform. If we
look at the Green Paper, there was a larger gap. The single tier
was about 5% or 6% higher than the basic Pension Credit rate.
That probably ought to be the sort of minimum [...] We would clearly
like it to be as high as possible, but if you take the Pension
Credit as a kind of benchmark, you definitely need a bit of clear
blue water between that and the single tier.
Citizens Advice made a similar point.
Prof Ginn argued that the starting rate for STP needed to be much
further above the Pension Credit rate "in order for people
to be certain that it is worth saving". She believed that
the gains the Government would make from increased NI contributions
"surely would allow a more generous state single-tier pension."
The TUC also criticised the "low starting level" for
the STP, believing that this means that "the reforms will
fail to eradicate means-testing for future pensioners".
127. The Government says that the reforms "have
been designed to cost no more overall compared to the existing
pension system". As we have indicated, without the proposed
changes, expenditure on State Pensions and pensioner benefits
would rise from 6.9% of GDP in 2012/13 to 8.5% in 2060/61. Instead,
with the STP in place, expenditure will rise to 8.1% of GDP by
2060. Age UK points
out that, as well as government spending on State Pensions reducing
as a result of the introduction of the STP, revenue from National
Insurance will also increase because of the ending of contracting-out:
by £5.9 billion a year in 2017; £4.3 billion by 2030;
and £5.8 billion by 2060.
This will result in a net increase for the Exchequer, even with
the additional costs of the STP. Age UK argues that this provides
scope for "a higher starting level to be set, or more generous
transition arrangements, or both."
128. In the Budget 2013 on 20 March, the Chancellor
gave an indication of how the additional NI revenue might be used.
He said that "the extra £1.6 billion raised in employee
National Insurance will not be kept by the Treasury" but
would be used "to support jobs and the small businesses that
create them" by establishing an "employment allowance"
which will remove "the first £2,000 off the employer
National Insurance bill of every company". The Chancellor
did not indicate how the additional NI revenue from employers
would be used, although he highlighted that it would cost £3.3
billion for public sector employers to absorb the additional NI
costs and that this would need to be taken into account in the
next Spending Review.
129. The DWP Impact Assessment acknowledges that
whether pensioners generally benefit in the longer term from the
STP will depend to a large extent on decisions by future governments
on uprating. As set out above, the Coalition Government has introduced
the "triple lock" for uprating State Pension (the highest
of growth in average earnings, CPI price inflation or 2.5%).
130. The IA assumes that the STP will be uprated
by the triple lock until 2060. However it states that:
Future governments will want to consider the level
of the single-tier pension and uprating in light of the wider
economic factors that are relevant at the time and the legislation
will provide this flexibility, underpinned by a statutory requirement
to uprate by at least earnings.
Schedule 12 of the draft Bill indicates that the
arrangements for uprating will mirror the existing situation:
"that the Secretary of State must increase the benefit by
a percentage not less than the percentage annual increase in the
general level of earnings".
Age UK emphasised that "the uprating policy will be really
important because, whatever the starting point is, if it is not
triple locked, the relative generosity of the pension will go
down over time."
131. The Minister pointed out that, because the STP
is triple-locked but Pension Credit will only be uprated by earnings
inflation, the differential between the two was likely to grow
quite quickly, given that the average percentage annual increase
in the STP was likely to be greater than that for Pension Credit.
of the key elements of the Single-tier Pension is that it will
be set above the rate for means-tested support, to ensure that
incentives to save into a private pension are clear and to complement
the aims of automatic enrolment. We believe that the requirement
for the level of the STP to be higher than the Pension Credit
Guarantee rate is a fundamental principle of the reform. We therefore
recommend that this principle is set out on the face of the Bill.
133. The indicative
starting rate of the STP at £144 per week is less than 1%
above the Pension Credit guarantee rate, a much lower differential
than was proposed in the Green Paper. We accept that the effect
of the Government's triple-lock is that the STP may increase more
quickly in value than Pension Credit, because the STP will be
triple-locked and increase each year by the higher of earnings,
inflation or 2.5%, whereas Pension Credit will be indexed to earnings
inflation. We also accept that pensioner income from the STP will
be increasingly complemented for many people by private pensions
saving, including from automatic enrolment.
there is no certainty about how long the triple lock will be in
place and we believe that it is important that there is as much
clear water as possible between the rate of the STP and that of
Pension Credit. There appears to be scope for a bigger differential
(either at the outset or over time) given the increased National
Insurance revenue that the Government will derive from the ending
of contracting-out and the overall long-term savings which will
be made on State Pension expenditure as a result of the introduction
of the STP. We therefore recommend that, when the Bill is before
Parliament in the summer, the Government publishes an analysis
of (a) the cost of setting the STP rate at a range of higher levels;
and (b) the level at which the STP could be funded if the additional
NI revenue was used for this purpose.
Uprating of State Pension for
UK pensioners living in countries where it is currently frozen
135. About 1.2 million British state pensioners live
abroad. In the EEA and 16 countries with which the UK has bilateral
agreements, UK State Pensions are uprated in the same way as for
state pensioners living in the UK. However, about 560,000 UK state
pensioners are living in countries where their UK State Pension
is not uprated. This means that their UK State Pension is paid
at the same rate as when they first became entitled. Most of the
people affected live in Australia, Canada, New Zealand and South
Africa. The Government
estimated in 2012 that it would cost £655 million a year
to uprate these pensions.
136. The Explanatory Notes to the draft Bill indicate
that the effect of Clause 20 is that there will be no change to
these uprating arrangements: "For overseas residents, regulations
may provide that such a person is not entitled to up-rating. This
will enable similar provision to be made as under the current
retirement pension system".
The Minister confirmed in oral evidence that this was the case.
137. We have received evidence from organisations
representing UK pensioners in the affected countries, as well
as a number of submissions from individuals affected by frozen
UK pensions. The International Consortium of British Pensioners
says that "the legislation freezing pensions causes great
hardship on those affected". It recommends that the relevant
provision is removed from the proposed legislation.
The Canadian Alliance of British Pensioners believes that the
current reform of State Pensions "is a once in a generation
opportunity to do what everyone knows is right: unfreeze the pensions
of those who live in countries in which pensions are currently
frozen" and address the "illogicality" of the current
arrangements for overseas UK pensioners.
The British Australian Pensioners Association similarly argues
that the system is unfair and complicated and that "the countries
where the state pension is frozen has no logical or reasonable
138. We understand
the frustration of UK pensioners living in countries where their
UK State Pension is not uprated. The fact that these pensions
are frozen in countries including Australia, Canada, New Zealand
and South Africa, but are uprated in many other countries, is
clearly an anomaly. While the introduction of the STP presents
an opportunity to remove this anomaly, any change would only apply
to those reaching State Pension Age after the STP implementation
date. Any decision on the situation of those who are already claiming
a UK State Pension overseas which is not uprated would need to
be taken separately and on its own merits.
111 DWP White Paper, p 92 Back
Q 12 Back
Q 14 Back
Q 58 Back
Qs 58 and 63 Back
Q 40 Back
Q 194 Back
Q 199 Back
Qs 12-13 Back
Q 220 Back
Explanatory Memorandum to the Social Security (Contributions)
(Amendment) Regulations 2013, paras 7.2-7.4 Back
Ev 89 Back
Qs 6 and 21 Back
Q 54 Back
Qs 207, 211 Back
Ev 97-98 Back
Qs 207, 211 Back
Ev 97-8 Back
DWP Impact Assessment, para 49 Back
Q 62 Back
Q 130 Back
Q 62 Back
HM Treasury, Budget 2013, HC 1033, March 2013, para 1.191 Back
Q 240. For further information provided by DWP on the level of
self-employed membership of private pension schemes, see Ev 97-98 Back
DWP White Paper, p 28 Back
DWP White Paper, p 12 Back
Q 42 Back
Ev 54 Back
Q 42 Back
Ev w14 Back
Q 74 Back
Ev 87 Back
DWP White Paper, p 12 and DWP Impact Assessment, para 17 Back
Ev 58. See also DWP Impact Assessment, p 35 and HC Deb, 19 March
2013, cols 43-46WS Back
Ev 54 and 58 Back
HC Deb, 20 March 2013, cols 941 and 944 Back
DWP Impact Assessment, paras 11-12 Back
Explanatory Notes to the draft Bill, para 32; see also HC Deb,
13 February 2013, col 715w Back
Q 5 Back
Q 229 Back
Ev w27 (ICBP) and Ev 97-98. See also House of Commons Library
Standard Note SN/BT/1457, 27 July 2011, Frozen Overseas Pensions;
and Qs 258-60 Back
HC Deb, 10 September 2012, col 3; see also Q 262 Back
DWP, Explanatory Notes to the Draft Pensions Bill, January 2013,
p 105 Back
Q 260 Back
Ev w27 Back
Ev w45 Back
Ev w10-11 Back