My Lords, Part 1 of the Bill is about future generations of pensioners who will benefit from the certainty of a contributory state pension set above the level of the basic means test.
We have dealt with a great deal of complexity as we have discussed the transition provisions. These are intended to respect past contributions by giving people reaching state pension age on 6 April 2016 onwards the higher of the value of their national insurance record calculated under both single tier or old scheme rules. As a result of this calculation, many people retiring in the early years of the single tier will have their pension boosted using new-scheme rules. So a woman with 30 qualifying years and £10 of state earnings related pension scheme in 2016 would get £123.30 of single-tier pension, which is around £6.30 a week more than under the old scheme rules. As illustrated here, the groups who will benefit most are those who have only modest amounts of additional state pension, if any at all. These tend to be, in the main, women and the self-employed whose social and economic contributions were not captured in SERPS and are not fully reflected in the state second pension.
As set out in these amendments, we now want to give existing pensioners and those reaching state pension age before 6 April 2016 the opportunity to boost their additional state pension by paying a new class of voluntary national insurance contribution: class 3A. The intention is that a unit of additional pension, obtained by paying the class 3A contribution, will provide £1 a week of extra pension. The extra pension itself will simply be added to people’s state pension. The intention is for the scheme to start from October 2015 and run for a limited time of between 18 months to two years. There are just two entitlement conditions to class 3A—entitlement to a UK pension and that the person reaches state pension age on or before 5 April 2016.
We published a briefing paper that provides more details of the scheme, but we have left some decisions to secondary legislation. These include questions such as whether there should be a cap, perhaps of £25 a week; how long the scheme should be open; and whether people should have a cooling-off period after paying class 3A contributions. As the extra pension
obtained will be the additional state pension, it will be uprated by CPI, it will be heritable and people will be able to defer, in line with existing rules.
I turn now to costs. As noble Lords will know, covering basic state pension gaps through existing class 3 is relatively cheap. A person paying class 3 to acquire one qualifying year of basic state pension will get their money back within four years of reaching state pension age. A different approach is required for class 3A to ensure that the arrangements do not become a burden for today’s national insurance contributors. So the costs of class 3A, which will be set by the Treasury, will be based on actuarially fair terms, in consultation with the Government Actuary’s Department. In keeping with this, the cost will be adjusted to reflect the age of the pensioner at the time they pay class 3A.
The briefing paper provides an example of how pricing based on life expectancy will work. The Government Actuary expects to report back to us on a pricing structure shortly. The report will take account of the latest ONS life expectancy estimates that were published on 11 December. I should clarify at this point that entitlement to pay existing class 3 voluntary national insurance contributions, which allows people to cover gaps in their contribution record for basic state pension, will be unaffected by this measure. DWP and HMRC will put in place administrative arrangements to ensure that individuals applying to pay new class 3A contributions are made aware that they should check their eligibility to make class 3 contributions.
4.30 pm
The department has conducted some customer research on the likely take-up of class 3A. A report, Additional Voluntary National Insurance Contributions at State Pension Age: Results from an Online Survey, was published on 20 December. The polling indicates that take-up levels are likely to be in the low hundreds of thousands. At this point we have not settled on an estimate of the additional national insurance revenue from class 3A or on the costs of the extra additional state pension that will be paid out over the years. I recognise that these amendments have been introduced at a late stage, but to wait for another legislative opportunity risks seeing a good idea, which will benefit existing pensioners, go to waste. I recognise that decisions on some of the finer details of the scheme are outstanding, but the main regulations will be subject to the affirmative procedure, so there will be further opportunities to test the overall proposition.
We all know that pensioners with savings have had more than their fair share of pain in the past few years. People will have to consider whether paying class 3A contributions is the best option for them. However, we believe that class 3A contributions will provide an opportunity for some people to boost their pension income with a secure, inflation-proof income, with the added advantage that it will provide survivor benefits. I therefore beg to move this amendment.