Pension Reform - Changes to state pension and pension credits

Pension Reform - Changes to state pension and pension credits

In addition to the changes to the UK state pension age, there will be several important changes to the state pension itself.  These changes will apply to men born from 6th April, 1945 and women born from 6th April, 1950:

• The link between the state pension and earnings will be reintroduced
• The minimum number of years' National Insurance (NI) contributions required to qualify for a full state pension will be reduced
• The Pension Credit system will be modified to favour people without any other income 

Link To Earnings

The state pension used to be linked to earnings - meaning that it went up in line with increases in average earnings. This rate of increase was then changed, and now the state pension is linked to inflation, instead.

Average earnings generally rise faster than inflation - which means that increases to the state pension have been lagging behind increases to average earnings. This is a continual woe to current pensioners, especially those who depend solely on the state pension.

In the June 2010 Budget, the coalition Government confirmed that from April 2011 the basic state pension would be increased by a ‘triple guarantee’ with rises being the greater of earnings, prices or 2.5%. 

National Insurance Contributions 

At present, most people need to have paid NI contributions, or received credits for 90% of their working life to qualify for a full state pension. This has often been difficult to achieve, especially for women, who may have taken several years out to bring up children or act as carers' to other family members.

From April 6th, 2010, these rules are changing.

Going forward, both men and women will only need 30 years of NI contributions to qualify for a full state pension. However, NI will continue to be paid until state pension age.

Full National Insurance credits will be awarded to both mothers who stay at home to care for young children up to 12 years old, and full-time carers for disabled people. This means that being carers or at home mothers should not make it any more difficult to qualify for a full state pension.

Pension Credits 

Pension Credits are the government's system for topping up state pension payments. At present, the Pension Credit system has two parts: 

Guarantee credit - this is for people who have less than £6,000 in savings and depend on the state pension. It guarantees a certain minimum income per week

Savings credit - this is for people who have another income as well as the state pension. It provides a small top-up amount each week.

The guarantee credit presently rises with earnings.  In April 2011 Pension Credit will increase by the cash rise in the full basic State Pension.

At the moment, both men and women qualify for the guarantee credit from age 60. This age is going to be increased to 65 in the same way as the women's state pension age. 

The savings credit currently increases faster than earnings, for some complicated reason. This seems to unreasonably favour people who already have better pensions, and is going to be scrapped.

From 6th April, 2008, savings credit payments started to rise in line with earnings. 

From 6th April, 2015, savings credit payments will rise in line with inflation - which will mean they rise more slowly.

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