UK Parliament / Open data

State Pension Regulations 2015

My Lords, this is the first set of new state pension regulations to be made under the Pensions Act 2014; further secondary legislation will follow over the next 12 months in the run-up to the introduction of the new state pension in April of next year. These draft regulations are largely technical and in many respects replicate the regulations governing the current scheme, although the legal language has been updated where appropriate. However, I should flag up at the outset two provisions governing the new scheme that differ from the current scheme and will be important for people in their planning for retirement.

First, Regulation 10 sets the accrual rate for increments—also known as extra state pension, paid where a person defers claiming their state pension—at the equivalent of around 5.8% per annum. The Government announced their proposal for the deferral rate on 22 July last year. The rate, which is based on advice from the Government Actuary’s Department published at the same time, is slightly higher than the rate of 5.2% assumed in the original estimates.

The rationale for moving from the current accrual rate of 10.4% per annum—set around 20 years ago but not introduced until a decade later—is to ensure that people get an actuarially fair return but not a bonus if they delay claiming their state pension. This is necessary to ensure that the costs of the new scheme do not exceed those of the current scheme. However, there may be other advantages in deferring claiming, such as in relation to tax. Typically this will be where a person continues in work beyond pension age and is a higher rate taxpayer, which means that if they draw their state pension it would also be taxed at the higher rate or alternatively that the higher rate of pension might send them into the higher rate tax band. If, on retirement, they are no longer a higher rate taxpayer, their state pension—including the increments on it for having deferred claiming—would be taxed only at the standard rate. That may be one reason why people would wish to defer.

The second factor to draw noble Lords’ attention to is Regulation 13. This sets the minimum qualifying period for entitlement to the new state pension. As announced on 13 December 2013, the minimum number of qualifying years of paid or credited contributions required will be 10. This is the maximum permissible under the enabling powers in Sections 2 and 4 of the 2014 Act. Setting this minimum qualifying period at 10 years is intended to ensure that entitlement to the new state pension is restricted to those who have a strong connection with and have made a significant contribution to the United Kingdom.

This approach is consistent with that adopted in many other European and OECD countries. Indeed, we in the United Kingdom adopted such an approach to the current basic state pension until 2010. A person needed then to have qualified for at least a quarter of the full basic state pension for any state pension to be payable. This 25% de minimis condition was perceived as having a disproportionately adverse effect on women in the United Kingdom—particularly ethnic minority women—who faced barriers in working outside the home. While this was undoubtedly the case historically, by the time the condition was lifted in 2010, under the changes brought about in the Pensions Act 2007, relaxation of the contribution conditions and improvements in the crediting arrangements, particularly for time spent raising children, meant that very few women in the United Kingdom would have failed the condition even in 2010, had it been retained. In effect, the change addressed a historical problem which, in reality, did not largely apply to the cohorts affected by the change.

Although not explicit in the draft regulation, I should point out that under the European legislation governing the co-ordination of social security systems, insurance or in some instances residence in another EEA member state will count towards the 10-year minimum qualification period but not the entitlement. In other words, it would affect a person qualifying but not count towards the amount they were paid by the UK authorities. I will try to give an example later on that might make that clearer. The same would also apply where people have been insured in a country with which the UK has a bilateral agreement—such as the USA or Israel—that allows for co-ordination of the two countries’ schemes in this way. It is not in my speaking notes but I will try to explain that. If a person has five years’ qualification in the United Kingdom and five or more years’ qualification in Europe, that would enable them to qualify but the pension they would be paid would be based on only the five years they were in the United Kingdom. I hope that that is helpful.

Turning to the remainder of the provisions, Regulation 1 is technical but importantly specifies that the regulations come into force on 6 April 2016—of course, we know that that is the operative date—alongside the state pension provisions in Part 1 of the Pensions Act 2014. It also ensures that the regulations reflect the Act by restricting the new state pension to people who reach pensionable age on or after that date.

Regulations 2 and 3 deal with prisoners under the power at Section 19 of the 2014 Act. These provisions will, thankfully, have only limited application but it is worth noting that the number of older people serving prison sentences has been on the rise over the past decade. Since 2002, the number of prisoners aged 60 and over in England and Wales has increased from around 1,500 to close to 4,000.

In essence, Regulation 2 provides that a person is disqualified from receiving the state pension if they are in prison as a result of a criminal offence or are serving part or all of a prison sentence in hospital—typically a secure psychiatric hospital. The basic principle

that a person should be barred from drawing their pension while in prison dates back over a century and is based on the premise that to pay the pension would constitute double provision by the state as the person’s “bed and board” is being provided and could therefore be construed as rewarding criminal activity.

The disqualification under the regulations also applies where a person is serving a prison sentence overseas but with the caveat that it does not apply if, in similar circumstances, the person would not have been imprisoned here in the United Kingdom.

The new regulation is more explicit than the current provisions in one respect in that it clarifies that a person continues to be barred from receipt of their pension if they are “unlawfully at large”—a splendidly Dickensian phrase. This is common sense. It would simply be absurd to put a pension into payment—in effect as a reward—if a person managed to escape from his prison or psychiatric unit where they were effectively a prisoner.

Regulation 3 covers the position of persons being held on remand in connection with a criminal charge. The principle here is relatively straightforward and has been applied for many years. Payment of the pension will be suspended while the person is being held on remand. If at the conclusion of court proceedings a prison sentence, including a suspended sentence, is imposed, payment of the pension is barred for the period during which the person was held on remand.

If a sentence of imprisonment is not imposed—typically where the person is found not guilty, but also if the court were to impose a fine—the suspension is lifted and arrears of pension paid for the period the person was held on remand. As I said, this is a common-sense approach because periods spent on remand prior to sentencing will normally count as time served when it comes to a person’s release from prison.

Regulations 4 to 11 deal with deferral of the state pension. In addition to Regulation 10, which I mentioned at the outset, these set out the detailed terms and conditions that underpin, first, inheritance of deferral benefits built up by a person who deferred their old state pension—that is, the state pension that is currently payable until 6 April next year—and, secondly, deferral of the new state pension.

Regulations 4 to 6 deal with the former—inheritance of old scheme deferral benefits—under the powers at Section 8 of the Pensions Act 2014. In the same way as the new state pension will not be inheritable, any increase from deferring the new state pension will not be inheritable either. However, deferral inheritance will continue to be available where the late spouse or civil partner had deferred an old state pension. The rationale for retaining inheritance rights here is that in these circumstances the availability of such rights may have been a key factor in a person’s original decision to defer their pension, particularly where their spouse or partner is, or was, significantly younger than them.

These provisions basically replicate the current provisions governing when and how a survivor can choose a lump sum payment instead of increments, and how and when such a choice can be changed. That is in respect of the old state pension. This will ensure

parity of treatment of survivors of people who deferred under the old arrangements, regardless of whether the survivor is covered by the old or new schemes.

Regulations 7 to 9 are made under the power at Section 16 of the Act and cover arrangements for people who, having initially claimed their pension, subsequently decide to “suspend” their entitlement—and thus, in effect, revoke their claim—in order to build up an increase under the deferral arrangements. Although the language has been modernised—the current regulations predate the removal of the retirement condition in 1989 and so are still couched in terms of an “election to be treated as not having retired”—the requirements and restrictions imposed by these regulations mirror those applied under the current scheme. Basically they are that entitlement can be suspended only prospectively, but not more than 28 days in advance, and must be done in writing or by phone; and that the suspension is lifted from the point when a person makes a further claim to state pension, which may be backdated for up to 12 months.

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Regulations 11 and 12 are made under the powers in Section 18 of the Act and deal with periods during which increments or extra pension do not accrue and the treatment of part-weeks in the calculation. The provisions in Regulation 11 largely mirror those that apply under the current arrangements by preventing a person from being able to accrue a pension increase while they are drawing another payment out of public funds, such as pension credit—clearly, that would be unfair. Regulation 11 prevents duplication of provision by precluding increments from accruing for any period during which a person who, although not claiming their state pension, is receiving another benefit out of public funds that would be abated or not available to them if they were drawing their state pension. The provision also applies where another person is receiving an increase of a publicly funded benefit in respect of the person who is deferring their state pension. Regulation 12 simply provides that, when the total number of weeks for which a person’s state pension has been deferred is totted up to calculate the value of the increments, any odd days are counted as a full week.

Regulation 14 and the schedule deal with the sharing of state pension rights on divorce. Currently, additional state pension can be included in the assets that are considered for sharing in divorce proceedings. From April 2016, only the protected payment—that is, an amount above the full rate—will be shareable.

The department is in effect the servant of the court and supplies information about the value of the individual’s state pension. It also implements orders from the court. The regulation and schedules introduce the concept of old and new pension-sharing arrangements to assist the courts and the department in administering pension sharing. I commend the regulations to the Grand Committee.

Type
Proceeding contribution
Reference
758 cc428-431GC 
Session
2014-15
Chamber / Committee
House of Lords Grand Committee
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