Pensions Minister Baroness Ros Altmann has launched a new Government communications drive to promote the introduction of the Single-Tier from April 2016. Interestingly, she admits that explanation of the reforms of the current ‘mind-blowingly complicated’ regime have not been done well enough (a stab in the back for the previous Pensions Minister there!).
The Single-Tier brings with it some important changes and reforms for individuals who reach State Pension age (SPa) on or after 06 April 2016. The employer is very much impacted as well. Therefore, similar to the Government’s ‘things you need to know‘ here are my thoughts and I wonder whether employers should be considering communicating this to their workers:
‘Your State Pension is Changing’
Individuals should be aware of who will be impacted by the changes, essentially, men born from 06 April 1951 and women born from 06 April 1953. People born before these dates will not be impacted and will be entitled to a pension under the current regime (part Basic and part Additional pension). The Single-Tier merges the two-part system and a flat rate amount will be paid instead.
- Point people to ‘Your State Pension is Changing‘ on the Gov.UK Website.
The SPa is increasing and there is a handy State Pension age calculator that employees can use to confirm the bad news that they will have to work longer!
People need to be aware that what is paid out under Single-Tier is related to what is paid in via National Insurance Contributions (NICs) or NICs Credits. This contributory condition is similar in nature to the current regime. At the start of Single-Tier, every individual will have their current State Pension entitlement converted to a starting, or foundation, amount. It is this amount that will be increased each year in line with Single-Tier accrual procedures, based on NICs or NICs Credits history.
People retiring from 06 April 2016 will need a NICs record for at least 10 years. Once an individual has 35 years, the full Single-Tier will be paid, currently in legislation as £151.25 per week.
People need to be aware that an accurate NICs record is vital. Less than 10 years they will get nothing, 10 – 35 they will get a prorated amount and 35+ they will get the full amount:
- Employees can read more on the importance of the NICs record at ‘Your National Insurance record and your State Pension‘. Note that the actual value of Single-Tier will not be known until it is announced at the Autumn Statement on 25 November 2015
- Employees over 55 can get a Personalised State Pension Statement that will estimate their pension under the new system
The End of Contracting-Out
Under the current regime, an employee can opt-out of the Additional State Pension, known as Contracting-Out. As a result, both employee and employer pay lower NICs. This is very important and should be communicated:
- From April 2016, employee and employer will pay more NICs if they are in Contracted-Out employment now
- The employee needs to be made aware and, possibly, given a comparison between what they pay now and what they will pay next year
- The employee needs to be aware that, as a result of a history of Contracted-Out employment, their starting / foundation amount in Single-Tier will be lower. This is because the conversion from the current to the new regime will require a deduction to be applied. However, where the employee already has 30 years on the NICs record, they can be reassured that the Single-Tier starting amount will be no less than what they would have received under the current regime. Again, it may be worthwhile pointing employees to ‘Your National Insurance record and your State Pension‘ and a ‘Personalised State Pension Statement‘
- The employer needs to be aware that they will have an increased NICs liability and they should also be checking how their payroll software will help changing NI category letters at the start of the 2016/17 tax year
Note that there is a service where individuals can get ‘free and impartial’ advice, however, this is all concerned with pensions flexibility in defined contribution pension schemes. This is called Pension Wise and is not for advice on the Single-Tier pension.
Anyone that knows me will also know that I am a firm believer in good education and communication. Combined, the right information communicated in the right way can prevent so many issues arising in the future, not least queries coming directly to the HR and payroll departments. We do not have to understand everything and act as personal advisors, indeed, this is something that I am totally against. However, we should be able to have a familiarisation with a subject and, importantly, have enough information to be able to point people in the right direction for further information.
Therefore, to answer my own question, I believe that we do have a professional obligation to communicate this important information to our employees. In fact, I wonder if employers should consider it all under the heading ‘duty of care’ that they should be demonstrating to their workers anyway
Of course, a lot of this depends on the quality of the guidance coming to us in the first place from Government, however, that is a separate topic altogether!