The long awaited White Paper was released on 25 May. It contains many proposals which would change the pensions system quite radically. Amongst its features are the following:

• A new low cost savings scheme through personal accounts in which employees will be automatically enrolled unless they are members of their employer's scheme which meets a minimum standard. Employers will be required to make matching contributions while the employee chooses to remain in that new scheme. It is thought that up to 10 million employees will 'choose' not to opt out.

• Employees will contribute 4% of a band of earnings between approximately £5,000 pa and £33,000 pa. Employers will pay 3% on the same band of earnings and a further 1% will be added from the employees basic rate tax relief (some employees will, of course, attract higher rate tax relief too).

• There will be measures to help smooth the introduction of this reform for business. Employers’ contributions will be phased in over three years at the rate of 1% each year. There will be consultation on additional transitional support for very small businesses.

• Non employees and the self-employed will be able to opt in to the personal accounts scheme.

• A higher state pension re-linked to earnings from 2012 but only if it can be afforded at that time. A statement on the precise date of implementation will be made 'at the start of the next parliament'.

• The state second pension will become a simple and flat rate top-up to the basic pension. This process will start at the same time as basic pension earnings linked increases (ie, 2012 or later) and be fully flat rate by 2030 or shortly after.

• There will be a gradual rise in the state pension age. It will rise to 66 over two years between 2024 and 2026 and then from 66 to 67 between 2034 and 2036 and then to 68 in 2044 to 2046. Of course, this will also increase the number of years for which national insurance contributions have to be paid, even if not needed to earn a full state pension (see below).

• There is an extension of the current anomaly whereby benefits can be earned for no financial contribution. The White Paper suggests modernising the contributory principle for the basic state pension and the state second pension so that ‘it rewards social contributions equally with paid contributions’. This will be done by cutting to 30 the number of qualifying years needed to receive a full basic state pension, replacing Home Responsibilities Protection with a new weekly credit for those caring for children, and introducing a new contributory credit for those caring for severely disabled people for 20 hours or more per week.

Internet link:

Pensions White Paper