The Single-tier State Pension: Part 1 of the draft Pensions Bill - Work and Pensions Committee Contents

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.


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 credit).

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.[111]

107. Sally West of Age UK believed that information about the availability of NI credits was a critical area.[112] 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.[113]

108. Both the PPI and Baroness Hollis emphasised the need for clarity on what would count towards NI credits under the new system.[114] 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 buybacks". [115] The importance of ensuring that women were aware of the implications for NI credits of the changes to child benefit entitlement was also emphasised.[116]

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.[117] 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 of crediting".[118]


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.[119]

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.[120] 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.[121]


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 (LEL—currently £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."[122]

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.[123] 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.[124]

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.[125] 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.[126]

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. [127]

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.[128]

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.

118. People 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.[129] 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".[130]

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.[131] 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 employment.[132]

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".[133] 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.[134]

124. Self-employed 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 retirement.[135] The 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.[136] Dr Altmann believed that "the logic of having it just above the means-tested Pension Credit threshold is sound".[137]

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. [138] 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.[139]

Citizens Advice made a similar point.[140] 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."[141] 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".[142]

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.[143] 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.[144] 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."[145]

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.[146]


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.[147]

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".[148] 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."[149]

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.[150]

132. One 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.

134. However, 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.[151] The Government estimated in 2012 that it would cost £655 million a year to uprate these pensions.[152]

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".[153] The Minister confirmed in oral evidence that this was the case.[154]

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.[155] 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.[156] 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 basis".[157]

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

112   Q 12 Back

113   Q 14 Back

114   Q 58 Back

115   Qs 58 and 63 Back

116   Q 40 Back

117   Q 194 Back

118   Q 199 Back

119   Qs 12-13 Back

120   Q 220 Back

121   Explanatory Memorandum to the Social Security (Contributions) (Amendment) Regulations 2013, paras 7.2-7.4 Back

122   Ev 89 Back

123   Qs 6 and 21 Back

124   Q 54 Back

125   Qs 207, 211 Back

126   Ev 97-98 Back

127   Qs 207, 211 Back

128   Ev 97-8 Back

129   DWP Impact Assessment, para 49 Back

130   Q 62 Back

131   Q 130 Back

132   Q 62 Back

133   HM Treasury, Budget 2013, HC 1033, March 2013, para 1.191 Back

134   Q 240. For further information provided by DWP on the level of self-employed membership of private pension schemes, see Ev 97-98 Back

135   DWP White Paper, p 28 Back

136   DWP White Paper, p 12 Back

137   Q 42 Back

138   Ev 54 Back

139   Q 42 Back

140   Ev w14 Back

141   Q 74 Back

142   Ev 87 Back

143   DWP White Paper, p 12 and DWP Impact Assessment, para 17 Back

144   Ev 58. See also DWP Impact Assessment, p 35 and HC Deb, 19 March 2013, cols 43-46WS Back

145   Ev 54 and 58 Back

146   HC Deb, 20 March 2013, cols 941 and 944 Back

147   DWP Impact Assessment, paras 11-12 Back

148   Explanatory Notes to the draft Bill, para 32; see also HC Deb, 13 February 2013, col 715w Back

149   Q 5 Back

150   Q 229 Back

151   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

152   HC Deb, 10 September 2012, col 3; see also Q 262 Back

153   DWP, Explanatory Notes to the Draft Pensions Bill, January 2013, p 105 Back

154   Q 260 Back

155   Ev w27 Back

156   Ev w45 Back

157   Ev w10-11 Back

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