Single-tier pension from 2016

The ending of contracting out is a key consequence of a single-tier pension system and will help to simplify the state pension system. It will remove the inter-connection between state and private pension schemes that, the government claims, “… can cause misunderstanding and confusion for individuals, difficulty in providing accurate estimates of state pension and adds to the administrative burdens for both pension schemes and HMRC”.

One of the main consequences for individuals of ending contracting out is that members of qualifying pension schemes will lose their National Insurance contributions (NIC) rebate, which currently helps to boost their pension contributions to the qualifying scheme. However, it has been estimated that around 90% of people who start to pay higher NICs from the implementation of the single-tier system and reach state pension age over the first two decades are likely to see an increase in their state pension. This will be enough, the government claims, to compensate them for both the effects of paying higher employee NICs and of accruing lower pension benefits in their occupational pension scheme.