Pensions Advice, Retirement Planning - Investment Financial Adviser Dunfermline, Fife, Scotland UK

Posted by William on August 24th, 2007 in Pension Advice

THE PENSION ACT 2007

As a consequence of Pension Reform legislation, the UK State Pensions System recently changed on July 26th 2007. The Pension Act 2007 was introduced and affects those who reach State Pension age on or after 6th April 2010.

Key points to note are as follows…

Parents and carers

In the updated state pension system, working and caring is to be recognised equally. More women and carers therefore become eligible for a full Basic State Pension and also for a State Second Pension.

Through new weekly national insurance credits, people reaching State Pension age on or after 6 April, 2010 can build up entitlement to Basic State Pension and State Second Pension People eligible for these credits would include:

• Those caring for children up to the age of 12.
• Approved foster carers.
• Individuals caring for severely disabled people for at least 20 hours per week.

Basic State Pension

Once you have reached State Pension age you can claim the Basic State Pension . This is the income you will receive from the Government to live in retirement with. You will only receive such an entitlement if you have paid (or be treated as having paid) sufficient national insurance contributions, or received credits towards your State Pension during your working life.

Primary changes to Basic State Pension include:

• Bringing down to 30 years the number of qualifying years needed for a full Basic State Pension for people who will reach State Pension age on or after 6 April 2010.
• Entitlement to at least some Basic State Pension will be given to any number of qualifying years - this is by paid or “credited” National Insurance contributions.
• A new weekly national insurance credit for those caring for children up to the age of 12 and for those who spend at least 20 hours a week caring for severely disabled people will replace the system of Home Responsibilities Protection (HRP).
• Past years of Home Responsibilities Protection will be converted into years of credits.
• Basic State Pension will increase in line with earnings, rather than prices. This means it will rise more quickly each year than it does currently (this begins from 2012 at the earliest and by the end of the next Parliament at the latest. It also applies to those already receiving their state pension now or who reach State Pension age before 6 April 2010).

State Second Pension

The State Second Pension is paid in addition to the Basic State Pension. It is also known as additional State Pension and reformed the State Earnings Related Pension Scheme (SERPS) in April 2002.

Key changes include:

• People may combine contributions from earnings with national insurance credits to gain qualifying years of State Second Pension.
• Allowing people caring for children up to the age of 12, foster carers and those who spend at least 20 hours a week caring for severely disabled people to build up entitlement.
• Changing the method of accrual so that in the future it provides a simple, flat-rate weekly top-up to the basic State Pension. The current earnings related element will be withdrawn so that people will build up entitlement on a completely flat-rate basis by around 2030 or shortly afterwards.

State Second Pension is not paid for any period where:

• You don’t work.
• You’re self-employed.
• You earn less than a set amount a year (£4,524 for 2007/2008).
• You earn more than £13,000 for 2007/2008 and are contracted out of the State Second Pension and instead pay into a personal pension plan.
• You earn above £30,000 (in 2007/2008) and are contracted out of the State Second Pension and instead pay into an occupational pension scheme.

If you are in a private pension scheme meeting certain conditions it is possible to contract out (opt out) of the State Second Pension. From 2012 at the earliest, contracting out into a private pension scheme on a defined contribution basis will be disallowed.

State Pension age

This is the earliest age at which you can claim your State Pension. Currently the age at which men and women can claim their State Pension differs. Women who reach State Pension age before 6 April 2010 can receive their State Pension at 60 and men at 65. However due to this new legislation State Pension age for women will increase to 65. It will become the same for both men and women by 2020 with the change being phased in from 2010.

Personal Accounts

Personal Accounts will be introduced from 2012. From this time all eligible workers will be automatically enrolled into either an existing suitable work-based pension scheme or into a Personal Account which is a new national private scheme.

Employers who do not provide a company pension already will have to do so - ie through Personal Accounts.

Aimed at low and median income workers those eligible will contribute 4% of their gross income (on a band of earnings between approximately £5,000 and £33,500) a year. In addition a minimum 3% employer contribution and a 1% contribution by the Government in the form of tax relief will match these worker contributions. Either party may also contribute more – but the government has not yet announced any upper contribution limit details.

Workers can however choose to opt-out of Personal Accounts or their employer’s occupational scheme.

Self-employed people are also eligible for a personal account – as well as non-employed people up to a limit of £3,600 a year.

On 11th July 2007 as part of its draft legislative programme the Government listed it’s intention to provide a detailed framework for Personal Accounts in a planned second Pensions Bill.

For comprehensive impartial advice on how your pension will be affected by the recent legislative changes in the new Pensions Act please contact your local Independent Financial Adviser.