The British Old Age Security System in 2020

By Christian Günther, Max Planck Institute for Social Law and Social Policy

Although haphazard pension arrangements for civil servants had existed in the United Kingdom since at least the late 17^th century, it was not until the 1908 Old Age Pension Act that a national pension system was put onto a statutory footing. This provided a means-tested pension to those over the age of 70 and constituted an important element in a package of social reforms that laid the foundations for the British welfare state. Since that time, the pension system has been overhauled multiple times – most notably in 1946 – and the New State Pension regime, which came into effect in 2016 pursuant to the Pensions Act 2014, marked the culmination of the latest slew of reforms.¹ Although this introduced substantial changes, the following three elements of the post-war pension system have remained largely intact: First, a state pension that provides a modest flat-rate income to most pensioners, requiring them to have made sufficient National Insurance contributions (NICs) during their working life. This is intended to offer pensioners a basic level of protection. Second, various incentivising strategies for the adoption of occupational and personal pension arrangements, which supplement the basic state-provided pension to cumulatively grant a ‘standard’ level of protection in old age. In particular, this ‘standard protection’ is intended to be ensured through occupational pension schemes for those in public or private employment and through personal pension schemes for those in self-employment. Personal pension schemes that are additional to such employment-related schemes are envisioned to be ‘top-ups’ of this standard protection. The third and final element is a means-tested ‘Pension Credit’ that seeks to provide a ‘minimum’ income to those who have insufficient state or private arrangements for this purpose.²

Standard Protection in Old Age

The first aspect of standard old age protection in Great Britain is the ‘New State Pension’, as laid down in the Pensions Act 2014, which is applicable to those reaching state pension age on or after 6 April 2016. In principle, it is open to anyone who reaches state pension age and has made, or is deemed to have made, sufficient NIC contributions for at least 10 years. The main features of this scheme are the following two: First, it is still funded entirely by NICs, and the ultimate flat-rate benefit for which an individual is eligible is dependent upon the number (but not the size) of yearly contributions that they have made throughout their working life, i.e. from the age of 16 to the state pension age. Individuals will be eligible for the full flat-rate pension if they have made contributions for at least 35 years. This flat rate is proportionally reduced for each year of contributions that falls below this 35-year threshold but is still above the 10-year minimum. Second, making NICs is mandatory for those in employment and those who are self-employed, so long as they have reached a certain age and are earning over a certain threshold amount. However, it is also possible to be credited with having made relevant NICs in a variety of circumstances and to make voluntary contributions where one’s record has gaps.

Since the full flat-rate amount of this basic state pension remains only marginally above the ‘minimum’ income provided through the means-tested Pension Credit, the government envisages that, as a matter of course, individuals will also engage in other forms of supplemental pension provision. For those in employment this standard level of protection is primarily ensured through occupational pension schemes, including specific public service pension schemes for those in public employment. Indeed, under the Pensions Act 2008 an employer is bound to auto-enrol his employees within an occupational scheme at regular intervals, merely providing the latter with the option to opt out. Such schemes may be external schemes, schemes directly run by the employer, schemes run by multiple employers or (in some cases) industry-wide schemes. The precise form of the scheme’s administration will be determined by whether it is based on a contract or a trust. Most schemes take the latter form and will thus be run by trustees, which owe fiduciary duties to the members of the scheme and thus will be independent from employer control. Contract-based schemes will not have legal personality, but rather constitute a separate pool of assets overseen by an independent institution. They must include independent governance committees that scrutinise how the scheme is run.

Those who are self-employed do not have access to occupational schemes and must thus fall back on personal pension schemes  in order to achieve a standard level of protection. In this respect, the government-backed ‘National Employment Savings Trust’ does provide a personal scheme that is specifically targeted at the self-employed, providing them with favourable terms, but participation is still entirely voluntary. Lastly, with regard to both occupational and personal schemes, the achievement of a standard level of protection is also incentivised through the state’s provision of various tax incentives.

Top-Ups

Although personal pension schemes may be the only way for the self-employed to supplement their basic state pension arrangements, it is in principle open to any individual to top up their pension through such personal arrangements. Furthermore, these will also benefit from various tax-reliefs, particularly if an individual’s contributions to all of their private pension schemes (and contributions on their behalf) remain below an ‘annual allowance’ threshold (introduced by the Finance Act 2004). This allowance is currently GBP 40,000, but it is tapered for high earners.

Minimum

The last element in the British pension system is made up of a means-tested Pension Credit, which was introduced in its current form by the Pensions Act 2014. The aim was to have a single streamlined system that provided only the poorest and most vulnerable in society with an ‘appropriate amount’ of money that the government deemed necessary for them to live on. For those of qualifying age, Pension Credit replaces the primary means-tested benefit that is provided to those of working age, Universal Credit, and therefore cannot be claimed concurrently. However, those who claim Pension Credit may also be eligible for other benefits, including: Winter Fuel Allowance, Cold Weather Payment, Housing Benefit and Council Tax Reductions.

¹ Please note that there is a distinct, albeit comparable, system in place in Northern Ireland, which is distinguished by separate legislation and institutions.

² Please note that there are various rules that apply in order to smooth the transition between the current and the older pension regimes. The following is intended to provide a prospective overview of the most up-to-date system only.