A Commons vote on the second reading of the Pensions Bill was won by 302 votes to 232, a majority of 70.

The coalition plans to increase the state pension age for men and women from 65 to 66 in 2020.

Women will see their state pension age increased from 60 to 65 by 2018, which has resulted in many commentators claiming the further increase to age 66 is unfair to women.

A group of around 330,000 women born during the early to mid 1950s will have to wait for two years longer before receiving their state pension.

Whilst the government did not waive from their intention to increase the state pension age, they did concede that some “transitional protections” for this group of women needed to be considered.

Delaying the state pension age increase from 2020 to 2022 would be very expensive.

Work and Pensions Secretary Iain Duncan Smith said during the debate that this move would cost the taxpayer £10bn, which would be an “unfair financial burden borne disproportionately by the next generation”.

Some interesting points were made during the debate by several MPs.

Jenny Willott MP made some important points about the benefits to women of the proposed change to a flat-rate state pension.

Whilst a group of women will have to wait for longer until they get their state pension benefits they will, on average, be in receipt of far more generous benefits following the introduction of the flat-rate pension.

Ben Gummer MP shared some longevity statistics with the House which highlighted one of the major issues for all pension benefits.

He explained that life expectancy is improving by around one quarter of elapsed time currently, so average life expectancy will have improved by 75 seconds in the five minutes it takes to read this blog.

Assuming these longevity figures are accurate, and they sounded a little stretched to us, it would suggest that the state pension age should increase by one year every four years.

In fact, there are plans to continue increasing the state pension age following the increase to age 66 in 2020.

The current law already provides for the state pension age to increase to 67 between 2034 and 2036, and to age 68 between between 2044 and 2046.

We expect to see this timetable revised, with these further age increases brought forward.

Photo credit: Flickr/TheCreativePenn

The green paper contains details of two main options under consideration.

Option one would involve a gradual move to a flat-rate state pension between 2013 and 2020. It would see the ability to contract out of the State Second Pension (S2P) retained.

This option would result in a total state pension of £145 per week, made up of a £97 basic state pension and £48 S2P.

The second option proposes a more radical reform of the state pension and is our preferred outcome from this consultation process.

Option two would involve introducing a single-tier state pension of £140 a week. It would be payable at a rate of around £155 a week by the time it was introduced.

This option would remove the ability to contract out of S2P and would result in a ‘contracting out offset’, so those who have accumulated contracted out pension benefits in the past would see their state pension income reduced accordingly.

Entitlement to a maximum state pension under either of these options looks set to still require a 30 year National Insurance contribution record.

Whilst either option would simplify the state pension system over time, it is option two that seems best placed to deliver the much needed levels of simplicity and remove most the confusion associated with state pension entitlement and pension credits.

Regardless of which option is chosen, it would only apply to new pensioners, with those already in receipt of a state pension income at the time the new flat-rate state pension is introduced continuing to receive their old pension benefits.

We look forward to seeing the outcome of this consultation paper and some additional detail around how entitlement to the flat-rate state pension will be accumulated and claimed.

Photo credit: Flickr/Waaghals

These changes, set to be announced in a green paper later this year, would combine all current elements of the state pension. This would include the basic state pension and the state second pension.

Those reaching their state pension age would instead receive a single payment above the level of the current pension credit.

Whilst at first glance this might appear to be a more expensive solution to dealing with the growing expense of the state pension, it is believed that the government could save £6bn a year by cutting the bureaucracy around means-testing.

The current means-tested system is fundamentally flawed because it can see those with moderate levels of private pension provision losing state benefits. This makes the delivery of retirement planning advice to those with lower earnings particularly challenging as recommended pension contributions can effectively be wasted money.

Removing means-testing for the state pension should result in a system where saving for retirement pays. This would bring the system into line with government aims for the overall benefits system, where they want working to be more beneficial than living on benefits.

One of the issues that will need to be addressed with this change is that of contracting-out of the state second pension (S2P).

Whilst contracting-out is set to be abolished for money purchase pensions from 2012 anyway, those who have not historically contracted-out could see their eventual state pension benefits cut under this new arrangement.

As there has been with most moves made recently by government, there will be questions about ‘fairness’ if the result is that those who contracted-out get to keep these benefits and those who remained contracted-in see their accumulated state second pension above the new universal state pension level lost.

We are not suggesting that those who decided to contract-out should be penalised for having done so, but those who remained contracted-in should see their state pension value reflect this decision.

Photo courtesy of Svadilfari.

The Spending Review is designed to help deal with our record national deficit and follows measures announced in the June Budget. Along with the public sector job cuts, we heard about intentions to cut the budgets of government departments by an average of 19%.

But what does the Spending Review mean for you and your money?

One change that a lot of people will notice is the increase to the state pension age. From 2020, the state pension age will be 66 for men and women.

This pension age increase comes along six years earlier than previously planned and means further acceleration of the currently ongoing age rise for women. This measure looks set to save the government around £5bn a year, by getting all of us to work for longer in the future.

Commuters are set to see their train fares increase, with a rise in the regulated cap on rail fares to 3% above inflation for three years from 2012.

Those on benefits are likely to see less money in their pockets each week as a result of the Spending Review and the previously announced Child Benefit cuts where one parent in a household is a higher rate income taxpayer. This cut alone is forecast to generate £2.5bn.

The Spending Review contained an additional £7bn of welfare budget cuts. There will be a new 12 month time limit imposed on employment and support allowance. This could result in an additional 200,000 claimants moved onto Jobseeker’s Allowance with a lower level of benefits.

Banking customers, which covers the majority of people in the UK, are likely to see higher banking charges in the future as a result of a permanent banking levy. The government expects to raise around £2.5bn a year with a tax on the total size of bank balance sheets.

We have every expectation that the banks will simply pass this cost on to their customers.

Active members of public sector pension schemes will see the level of their employee contributions increased in order to maintain benefit accrual. This follows Lord Hutton’s recent interim Public Sector Pensions Review and could save £1.8bn a year by 2014/15.

Employers should be starting to budget now for the cost of compulsory pension contributions from 2012, when the National Employment Savings Trust (Nest) is introduced. This was designed to help encourage people save for retirement, with employers having to contribute alongside contributions from employees and tax relief added to these contributions.

This Spending Review will result in changes to the financial plans of many people. It should be viewed as a catalyst to review existing plans and take action where necessary.

Photo courtesy of themostinept.

At the moment, it is the life expectancy of the population as a whole that is considered. This masks the fact that those on lower incomes typically have poorer life expectancy than wealthier individuals.

Those on lower incomes tend to be more reliant on the State Pension as well.

Another sensible suggestion made by the ACA is to phase in the increase to age 66. If the move is made on a single day, people could face a “birthday lottery”, where those born only a day earlier receive an additional year of retirement income.

They acknowledge that making the change in one go would be cheaper than phasing it in over time, but call for a gradual introduction of the higher State Pension Age, possibly over two years.

Those planning for retirement should be aware of these issues, even if the State Pension is not going to be their main source of income in later life. A higher State Pension Age could mean that individuals need to consider funding a temporary shortfall, of a year or longer, between their intended retirement date and their State Pension Age.

This is because the amount of State pension that you receive depends upon your National Insurance contribution record.

It used to be the case that to get the full basic State pension a man would need a full contribution record of 44 years and woman would need 39 years of full contributions.

The good news is that, from next year, the number of qualifying years needed for the full basic State pension is just 30 for both men and women.

So the answer to the question becomes pretty straight forward.

If you have or are likely to accrue less than 30 years of full NI contributions you might want to consider topping up your record. You can do this by paying Class 3 voluntary contributions currently charged at £12.05 per week.

If your record is (or is going to be) good enough then you might invest elsewhere to top-up your retirement benefits.

Full details available at www.direct.gov.uk.