Flat Rate State Pension (FRSP)
A summary of the Flat Rate State Pension proposals due to take effect from April 2016 is given below:
- New rules for calculating State Pensions expected to take effect from 6 April 2016.
- Changes announced in the Pensions Act 2014 which received Royal Assent in May 2014.
- For people reaching State Pension Age after 6 April 2016 the current State Pension, made up of Basic State Pension (BSP), Additional State Pension (ASP) and Graduated Pension (GP) will be replaced by the new Flat Rate State Pension (FRSP), the maximum amount of which is £148.35 per week (In 2014/15 money terms).
- BSP and ASP will cease to accrue from 6 April 2016.
- The £148.35 p.w. is the maximum and is accrued over 35 years. If have less paid or credited years National Insurance payments, you only get the relevant proportion of this, e.g. 20 years of credits means Flat Rate Pension = £148.35 x 20/35. In addition if you have been contracted out for any time before 6 April 2016 the formula £148.35 x 20/35 is reduced by a “Rebate derived amount”, which appears similar to the old contracted out deduction. No such deduction however appears to apply to Self Employed people even though they will have been paying lower NI Contributions than employed people paying Class 1 NI Contributions in the past.
- Minimum number of years of contributions to qualify at all for the new flat rate pension is 10 years. If you have less credited years than this at State Pension Age, your Flat Rate pension will be £0.
- The £148.35 p.w. is subject to the Government’s Triple Lock of guaranteed increase in April each year as the BSP is currently, that is an increase equal to the greater of 2.5%, or CPI (in year to previous September) or increase in average earnings.
- For anyone who reaches State Pension Age after 6 April 2016 the Government will calculate the total BSP+ASP+GP that an individual has accrued at 6 April 2016. This is compared with their accrued FRSP (1/35 x service x £148.35 p.w.) less any “Rebate derived amount” for anyone who has been contracted out in the past and the higher of the two figures is referred to as their “Foundation Amount” at 6 April 2016. On reaching State Pension Age an individual will receive the Foundation Amount. Should the Foundation Amount be lower than £148.35 p.w. the individual will additionally receive subsequent accrual post 6 April 2016 up to the maximum of £148.35 p.w. The FRSP is additionally indexed by any subsequent revaluation applied in tax years after 2016/18 under the triple lock rules. The Government undertakes that no-one after 6 April 2016 will receive a lower State Pension than that accrued to 6 April 2016 under the old rules.
- Individuals can defer taking the FRSP from their State Pension Age (SPA) until a later date in return for an enhanced pension as currently but the option to receive a lump sum in lieu of deferring taking State Pension for a number of years will no longer be available.
- If you reach State Pension Age prior to 6 April 2016 you will not be affected by these changes and will receive State Pension at your SPA as per current rules.
- Contracting out will cease from 6 April 2016, at the same time that the FRSP is introduced.
- From the time that contracting out ceases, employers and employees in contracted out pension schemers will see a large hike in their National Insurance (NI) Contributions bill each month as they start to pay NI contributions at the higher “Contracted In“ rate rather than at the lower “Contracted Out” rate. This will lead to lead to increased NI contributions of 3.4% of Band Earnings for employers and 1.4% of of Band Earnings for employees.
- In relation to State Pension Ages, the Government will commisson an independent review of Life Expectancy every 5 years, and if life expectancy has increased then it will be possible to adjust individual’s future State Pension Ages as a consequence of this without needing new Primary Legislation (i.e. a new Act of Parliament) every time a change to State Pension Ages needs to be put through. In considering whether a change to SPA is appropriate at a future review date, the Goverments wants to ensure that on average, people will maintain a specific proportion of their adult life receiving State Pension.