PPI PENSIONS POLICY INSTITUTE Introduction to the UK

PPI PENSIONS POLICY INSTITUTE Introduction to the UK Pensions Framework Chris Curry Research Director, Pensions Policy Institute www. pensionspolicyinstitute. org. uk ©PPI 2007

What is a pension? World Bank definition PPI PENSIONS POLICY INSTITUTE The three main goals of pensions systems are: • • • Redistribution from the rich to the poor to prevent poverty in old age Providing a savings vehicle to allow individuals to redistribute across their own lifetime to avoid poverty in old age Providing insurance as a social safety net for those who become unable to work

What should the role of the state be? PPI PENSIONS POLICY INSTITUTE 1. Alleviation of poverty 2. Prevention of poverty 3. Belonging and participation in the community 4. Continuance of economic status 3

PPI PENSIONS POLICY INSTITUTE The UK pension system Tier 1 State Tier 2 State Unfunded Contributory Compulsory Voluntary BSP: Basic State Pension S 2 P: State Second Pension or credits for most workers or (different) credits for most employees Previously SERPS State Means-tested Tier 3 Private, tax incentivised Funded Occupational Contracting and personal -out pensions Pension Credit = Guarantee Credit + Savings Credit

PPI PENSIONS POLICY INSTITUTE The UK state pension and benefits system is complex 23 benefits for pensioners; 36 linkages between them

The First Tier: Basic State Pension (BSP) • • PPI PENSIONS POLICY INSTITUTE BSP is contributory (not universal) Not everyone receives the full amount of £ 84. 25 How much you get depends on how many years you ‘qualify’ For a full pension a man needs to qualify for 44 years, a woman for 39 You can qualify each year through earning enough (including self-employed), receiving certain benefits (unemployment or disability) Years spent caring man you need less years to qualify for a full pension If you do not qualify in your own right you can claim a pension through your husband

The First Tier: Basic State Pension (BSP) PPI PENSIONS POLICY INSTITUTE Number of working age people accruing a qualifying year for BSP under the current system UK, 2004/5 Millions Earning enough 24. 2 Caring for children 1. 7 Other caring 0. 1 Other credits 4. 4 Not qualifying 4. 7 13%

The First Tier: Basic State Pension (BSP) PPI PENSIONS POLICY INSTITUTE Proportion of pensioners receiving less than the full amount of Basic State Pension (BSP) as at 31 March 2004 Men Women Pensioners receiving less than the full BSP 10. 2% 50. 9% Pensioners receiving less than 75 per cent of the full BSP 2. 9% 42. 7%

The First Tier: Pension Credit (PC) • • • PPI PENSIONS POLICY INSTITUTE Pension Credit is means-tested: the amount you get depends how much other income and savings you have. There are two parts: Guarantee Credit (GC) and Savings Credit (SC) GC tops income up to £ 114 a week (£ 174 for couples) SC is a ‘reward for saving’ – for every £ 1 of income above the BSP level, 60 p of SC is paid. This is withdrawn for every £ 1 of income above the GC level PC has to be claimed: currently between 61% and 69% of those entitled claim

PPI PENSIONS POLICY INSTITUTE The First Tier: Pension Credit (PC) Number of Pension Credit claimants (overall and by component being received), May 2006 Number of claimants by component being received (000’s) GC only GC + SC SC only Total PC Women 425 335 948 1, 709 Men 350 263 395 1, 009 Total 776 599 1, 343 2, 717

The Second Tier: State Second Pension (S 2 P) • • • PPI PENSIONS POLICY INSTITUTE S 2 P is contributory How much you get depends on how many years you ‘qualify’ and how much you earn in that year You can qualify each year through earning enough (NOT including self-employed), receiving disability benefits or caring If earnings are low, or qualification is through caring or disability a minimum flat-rate is awarded Higher earners receive a higher pension Fewer people are covered each year than for BSP

The Second Tier: State Second Pension (S 2 P) PPI PENSIONS POLICY INSTITUTE Number of working age people accruing a qualifying year for S 2 P under the current system, UK, 2004/5 Millions Earning enough 21. 7 Credits 3. 7 Not qualifying 9. 6 27%

The Second Tier: Contracting-out • • PPI PENSIONS POLICY INSTITUTE Some or all of S 2 P can be provided through a private pension rather than the state Part of your NI contribution is paid to a private pension Less S 2 P is paid by the state The amount from the private pension could be more or less than the amount you would have got from the state

The Second Tier: Contracting-out PPI PENSIONS POLICY INSTITUTE

The Third Tier: Private Pensions • • • PPI PENSIONS POLICY INSTITUTE Private pensions can be provided through an employer or arranged individually Pensions can be Defined Benefit (DB) or Defined Contribution (DC) There are (generous) limits on the amount than can be contributed to a pension and the total size of a pension Most pension must be taken as an income – though 25% can be taken as a tax-free lump sum Pensions have to be taken between age 50 (55 from 2010) and 75

The Third Tier: Private Pensions PPI PENSIONS POLICY INSTITUTE Proportion of working-age people currently accruing a non-state pension (2004/5)[