A good question in many scenarios, but this time one asked by the Institute for Fiscal Studies with regards to the new single tier pensions system. In our blog post Single tier state pension – a simpler system? we outlined the current Bill progressing through Parliament and highlighted some of the proposed changes to the state pension. It is intended that from 2016 a new single tier pension will replace the basic state pension and the state second pension for anyone not yet of retirement age. The new state pension is expected to be about £146 a week, £144 in today’s prices, and will bring an end to earnings-related state pension accrual in the UK, replacing it with an essentially universal system – the single tier pension.
This month, the Institute for Fiscal Studies has produced a full report entitled A single-tier pension: what does it really mean? They have used data from National Insurance contribution histories and data from the English Longitudinal Study of Ageing to identify who will benefit from these reforms, and who will be worse off.
Their conclusions are:-
• The new system will give more extensive crediting for periods of unpaid activity, such as looking after children.
• Many of those close to retirement now will see little change in the pension income that they can expect to receive.
• Of those closer to retirement age now, those who are likely to see the largest increases in their state pension income are women, people with relatively low wealth and those who have been self-employed, although some of these increases in state pension income will be offset by the loss of means-tested benefits
• For those further from retirement, particularly those born mid-80’s onwards, for most people the effect of the proposed reforms will be to reduce state pension income. It will become even more important for them to save privately to fund retirement.
• For the younger generation, the higher earners will be hardest hit.
• The new system should be more transparent, easier to understand, and less expensive to the exchequer.
For readers who don’t have the time to wade through the whole 71 page report, a concise press summary can be found here. The Guardian article can be found here, and the Telegraph article pronounces that workers under 40 lose out in pension reforms.
So what does this mean for couples who are divorcing?
Well, it reemphasises the importance of ensuring that all pensions are properly dealt with within the financial settlement. Firstly, full financial disclosure must take place, and that includes transfer values of each spouse’s pension or pensions. Often a private pension is one of the most, if not the most, valuable asset in the marriage. Careful consideration and analysis will then be needed to consider whether there should be an adjustment in the pensions to achieve a fair settlement overall. One pension value may well not be directly equivalent to another, and in addition to seeking legal advice from your Solicitor, in certain circumstances professional advice from a pensions specialist may be sought to ensure that the true values of the pensions are taken into account. In many cases there needs to be a pension sharing order in relation to one or more of the pensions.
Edited 12 July 2013