Time out of the workforce means that many women get a raw deal from the state pension system. Ian Naismith talks about what needs to be done to resolve this issue
Many women get a raw deal on pensions. They sacrifice career prospects to bring up children and possibly also look after aging parents, and find themselves struggling to make ends meet in retirement, particularly if by then they are widowed or divorced.
Many women accept that taking time out of the paid workforce will mean that their private pension is lower than a man's. The Scottish Widows UK Pensions Report for 2007 revealed that only 41% of women were saving enough to provide an adequate pension relative to their current earnings, compared with 54% of men. Since women typically earn less than men, the gap in post-retirement income is even larger.
However, women feel entitled to expect a state pension that is comparable with their male counterparts. They may not have paid national insurance (NI) contributions throughout their working lifetime, but they have contributed to the economy by bringing up the next generation, and expect that to be recognised. Sadly, many are disappointed.
According to Government statistics only around 30% of recently-retired women receive the full Basic State Pension (BSP) of £87.30 a week compared with around 85% of men. Women generally have a much lower total income than men, and are more likely to depend on the means-tested Pension Credit to supplement personal income. Everyone agrees this needs to change.
One solution proposed was to pay the full state pension to everyone, regardless of their national insurance (NI) record, if they had been resident in the UK for at least a minimum period before retirement. The Government believed this would be too expensive to implement and would create serious transition issues.
Instead, the Pensions Act 2007 reduces the NI hurdle that has to be cleared to obtain the full BSP. Currently NI contributions have to be paid or credited for 90% of an individual's working life between 16 and state pension age (SPA) for the full BSP to be paid. That means 44 years of contributions or credits for men with an SPA of 65 and 39 years for women with an SPA of 60. The change in legislation means that for both sexes the requirement reduces to 30 years of NI contributions from April 2010.
This is very good news for many women, and the Government estimates that around three-quarters of women reaching SPA in 2010 will be entitled to the full BSP, rising to over 90% by 2025 (helped by the increase of female SPA to 65). Coupled with other measures designed to increase the likelihood that those with caring responsibilities will receive adequate pensions, it represents a step-change improvement in women's retirement prospects.
However, this still leaves a quarter of women disadvantaged throughout retirement in 2010, and many more now. An amendment proposed by Baroness Hollis attempted to address this issue by allowing more scope to pay special contributions to 'buy back' missed years of NI contributions. Baroness Hollis is a former DWP minister who has been a tireless campaigner to improve pension provision for women.
Currently, it is possible to buy back NI contributions missed in the previous six years. If contributions were missed further back, they are gone forever. Baroness Hollis proposed that it should be possible to buy up to nine years, irrespective of how long ago they had been missed. Crucially, this means that women (and men in a similar position) could decide at retirement whether this was worthwhile for them. The pros and cons would be a lot clearer then than earlier in life.
This measure would help specific groups of people who have missed NI contributions. It is not designed for women who take time out of the workforce to care for children, because they have NI credits added through Home Responsibilities Protection while they are receiving Child Benefit. Instead it would give potential for additional state pension for those not covered by that scheme. This includes:
- those who spend time caring for elderly parents;
- those who have two part-time jobs, both of which give earnings below the national insurance threshold; and
- grandparent who takes on childcare responsibilities.
Baroness Hollis won over all sides of the House of Lords with her amendment, and inflicted a major defeat on the Government. She also received considerable support in the House of Commons. However, the Government pushed the Bill through without the amendment, having made the promise that it would consider in detail the best way to address the issues raised and report on progress in the Pre-Budget Report.
In the end, it was not until Baroness Hollis raised the issue again just before Christmas that the Government announced it had decided to take no action. The reason given was that neither the original proposal nor any alternatives suggested met the key criteria of fairness, affordability and simplicity. Cost was clearly an issue, with the Government estimating £1.3 billion by 2050, along with a view that it would not be particularly well targeted at lower earners.
It could be argued that this was a change that would benefit a relatively small number of people and so not finding a satisfactory solution is a relatively small issue in the context of great improvements to state pensions for women. However, the move could have been implemented quickly and alongside longer-term benefits it would have alleviated the 'cliff edge' nature of the changes where someone reaching SPA on 6 April 2010 could receive a much higher pension than someone just a day older with an identical employment history. It also sends out a negative message about the Government's commitment to helping women achieve adequate pensions, and may highlight tensions between the Department for Work & Pensions and the Treasury on such measures.
Financial advisers need to be aware of clients' state pension options, and if this measure were to be resurrected it could be an important factor in pre-retirement planning for some clients. It is quite possible that another defeat in the Lords, or even the Commons, could force the Government to implement it after all. One thing is certain: Baroness Hollis will not let the matter drop until she achieves a satisfactory outcome.
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