Budget 2013 - pension changes and retirementState pension reforms timetable announced
20 March 2013
Today the chancellor confirmed the introduction of a flat-rate state pension one year earlier than planned, and that employees paying more National Insurance (NI) contributions because of changes to the state pension will receive higher benefits when they retire.
When the £144-a-week pension is introduced in 2016, contracting out of the state second pension (S2P) will be abolished.
This means that the NI rebate given to private sector employees who contracted out will also disappear, leaving those employees to pay higher NI contributions. This won't apply to public sector employees, who tend to be enrolled in defined benefit schemes.
Watch our video discussing the changes to state pension, and all the other highlights, from the 2013 Budget.
Extra state pension for contracted out workers
Until today, it was expected that private sector employees would simply have to absorb these increases – which amount to an extra £3.3bn - without seeing any concurrent pension benefits.
However, today chancellor George Osborne announced that those extra NI contributions would secure formerly contracted-out workers extra state pension. He gave the example of a 40-year-old who has paid an extra £6,000 into their S2P receiving an extra £24,000 from their state pension.
This will be good news for consumers – according to a Which? survey of 2,000 consumers, 65% are worried about the value of their pension, and many are not prepared for retirement.
The chancellor said that this initiative would raise £1.6bn, which won't be kept by the Treasury. Instead, it will contribute towards the new employment allowance, which will be worth up to £2,000 per employee.
Help for Equitable Life customers
The chancellor also announced an extension of the Equitable Life compensation scheme to cover customers who held with-profits policies before 1992.
When the scheme began two years ago, its £1.5bn pot didn't cover these customers. Now, the scheme will award these policy-holders £5,000 each, with an extra £5,000 being made available for pensioners claiming pension credit.
No nasty surprises for pensioners
Pension savers have been hit hard by previous announcements. The annual allowance (the amount you can save into a pension without paying tax) has been slashed from £255,000 to £40,000 in the past two years, and the lifetime pension allowance was also cut in last year’s Autumn Statement from £1.5 million to £1.25 million.
There has been speculation that this year the chancellor would announce a further reduction in the annual allowance, but the fact that he hasn’t will be a relief for consumers, who are feeling the squeeze when it comes to retirement income. Just 42% of people are currently contributing to a pension - with the most likely reason for not contributing being affordability.
However, because there have been so many changes to pensions in recent months – the acceleration of the introduction of the flat-rate state pension to 2016, for example – it looks like the government has decided to save the radical changes for areas such as taxation. For more on the state pension, visit our guide, State pension explained.
Long-term care cap cut
The reduction of the cap on long-term care contributions from £75,000 per lifetime to £72,000 per lifetime was revealed earlier this week. Today the chancellor reiterated how beneficial this cap would be to the public, saying that it would help an extra 100,000 people who aren’t receiving any support under the current care system.