1. DWP New State Pension Delivery Programme Van Demosthenous Date:Tuesday 23 September 2014 State Pension Changes and the Ending of Contracting-Out

2. 2 Contents Why Change? Key Changes Ending of Contracting-Out –Employers –Employees Planning for the Ending of Contracting-Out Further Information Any Questions?

3. 3 New State Pension – Why Change? The current State Pension scheme is complicated and has been subject to piecemeal reform over decades, for example: –basic State Pension –Graduated retirement benefit –SERPS/State Second Pension –Contracting-out (of the additional State Pension) As a result, it's difficult for people to know what they can expect from the state and how much extra they need to save for their retirement The new State Pension will deliver simplicity – a simple State Pension that is set above the basic level of means-tested support to provide a clear foundation for retirement saving

4. 4 Disability and Carer benefits e.g. Carer’s Allowance, PIP, Attendance Allowance Housing Benefit & Council Tax Benefit New State Pension Guarantee Credit with higher rates for those with additional needs Means tested benefits new State Pension- full amount is above the basic level of Guarantee Credit Contributory benefit Disability and Carer benefits e.g. Carer’s Allowance, PIP, Attendance Allowance Plus private / workplace pension entitlement where applicable Plus private/ workplace pension saving boosted by automatic enrolment 25p Age addition (80 yrs +) Guarantee Credit top up to £148.35 – with higher rates for those with additional needs Basic State Pension full amount is £113.10 Contributory benefits Housing Benefit & Council Tax Benefit Current System Additional/Graduated Pension (AP) including Grad, SERPS and S2P, amount can vary depending on earnings and the years over which contributions were paid (range from £0.01 - £160 Inherited AP on bereavement or shared AP on divorce Contracted-out deduction those in certain occupational pension schemes could contract out of additional State Pension - Pension Credit An income related benefit made up of two different parts, Guarantee Credit and Savings Credit. Derived rights to basic State Pension (bSP) – those who do not have (bSP in their own right may get some bSP based on the NI record of their spouse or civil partner - Savings Credit Means tested benefits New State Pension - how will the system be made simpler? Housing Benefit & Council Tax Benefit Disability and Carer benefits e.g. Carer’s Allowance, PIP, Attendance Allowance

5. 5 New State Pension – Key Changes Effective from 6 April 2016 for individuals who reach State Pension age on or after that date Replaces the basic and additional State Pension with the new State Pension – this will be set just above basic level of means tested support (currently £148.35) Brings an end to contracting-out (of the Additional State Pension) Based on 35 years to receive the full rate of the new State Pension once in steady state – calculated on a pro-rata basis between 10 and 35 years. Qualifying years can be made up of paid or credited contributions and do not need to be sequential Entitlement is based on an individual's own NI contribution record – arrangements to increase State Pension from a spouse/civil partner’s contribution record will cease Brings self-employed people fully into the State Pension scheme Removes entitlement to the Savings Credit element of Pension Credit Removes deferral lump sum payments – individuals will still be able to defer claiming their State Pension to receive a higher weekly amount Individuals reaching State Pension age before 6 April 2016 will continue to receive State Pension under the current rules

6. 6 New State Pension – Ending of Contracting-Out Employers affected: Any employer that sponsors an open defined benefit workplace pension scheme up to 5 April 2016 What this means for affected employers: From 6 April 2016, the reduced rate of NI contributions paid by employers for contracted-out employees will end This means employers will see an increase of 3.4% on relevant earnings to their NI contributions for contracted-out employees – for an employee earning £25,000, this could mean an increase to employer NI of around £55 per month Private sector employers can make limited changes to their schemes to offset the increase in their NI contributions Strict rules will apply to limit the amount recouped to the cost of the extra NI contributions Where agreement cannot be reached, a “statutory override” can be implemented without trustee consent but only following relevant consultation with scheme members – this action may take up to 12 months to complete The statutory override is not applicable to public sector schemes

7. 7 New State Pension – Ending of Contracting-Out Employees affected: The ending of contracting-out affects all individuals who are part of a defined benefit workplace pension scheme on 5 April 2016 What this means for affected employees: From 6 April 2016, the reduced rate of National Insurance (NI) contributions will end This means employees will see an increase of 1.4% in their NI contributions – for someone earning £25,000 per year, this would mean an NI increase of £23 per month In April 2016, we will give people a starting amount based on their pre-2016 NI record. As now, this will take account of any periods when they have been contracted-out of the additional State Pension. This reflects the fact that they have paid lower National Insurance in the past From 2016, people can build on their starting amount towards the full rate of the new State Pension (currently those contracted-out build little or no additional State Pension, so may receive basic State Pension only - £113.10) It is estimated that around 90% of people paying extra NI contributions and retiring in the first 20 years of the new system, will receive more in extra State Pension in retirement than they will pay in additional NI contributions during their working lives

8. 8 New State Pension – Planning for the End of Contracting-Out Employers need to ensure: Their Scheme Contracted-Out Number (SCON) is correct when completing the Full Payment Submission (FPS) through the Real Time Information (RTI) system with HMRC The correct employee NI contributions are in place for 6 April 2016 Changes to NI contributions and workplace pension schemes are communicated to affected employees Private sector employers should: Discuss any potential changes to their scheme with their advisers, lawyers, trustees etc to explore available options, planning for the necessary activities in time for the ending of contracting-out Employers should also consider: Asking your scheme administrators to register for the HMRC Scheme Reconciliation Service (available between April 2014 and March 2016)HMRC Scheme Reconciliation Service

9. 9 Further Information More information about the new State Pension changes can be found on GOV.UK: –New State Pension guideNew State Pension guide –Single-tier Pensions PolicySingle-tier Pensions Policy –The Pensions Bill 2014The Pensions Bill 2014 –Consultation on the ending of contracting-outConsultation on the ending of contracting-out A series of fact sheets are currently being developed to provide more detailed information on the new State Pension and the end of contracting-out – these include fact sheets aimed specifically at employers, employees and trustees. Fact sheets will be available on GOV.UK during October 2014 Employer and Countdown bulletins available from HMRC website

10. 10 Any Questions?