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Brief History of the State Pension

State pensions are pensions paid by the government to individuals. State pensions have been in existence in the UK since the early 1900′s when Lloyd George then chancellor of The Exchequer under the Liberal government led by Herbert Asquith, introduced the very first state pension. It is widely acknowledged that Lloyd George was influenced by the ideas of Tom Paine and especially his book The Rights of Man published in 1791. Paine strongly recommended progressive taxation, family allowances, old age pensions, maternity grants and the abolition of the House of Lords.

Lloyd George had been a long opponent of the Poor Law in Britain. He was determined to take action that in his words would “lift the shadow of the workhouse from the homes of the poor”. He believed the best way of doing this was to guarantee an income to people who were to old to work. Lloyd George’s measure, the Old Age Pensions Act, provided between 1s. and 5s. a week to people over seventy. These pensions were only paid to citizens on incomes that were not over 12s. (means tested)

In 1902 George Barnes General Secretary of the Amalgamated Society of Engineers, formed the National Committee of Organised Labour for Old Age Pension. Barnes spent the next three years travelling the country urging this social welfare reform. The measure was extremely popular and was an important factor in Barnes being able to defeat Andrew Bonar Law, the Conservative cabinet minister in the1906 General Election.

To pay for these pensions Lloyd George had to raise government revenues by an additional £16 million a year. In 1909 Lloyd George announced what became known as the People’s Budget. This included increases in taxation. Whereas people on lower incomes were to pay 9d in the pound, those on annual incomes of over £3,000 had to pay 1s. 2d. in the pound. Lloyd George also introduced a new supertax of 6d. in the pound for those earning £5000 a year. Other measures included an increase in death duties on the estates of the rich and heavy taxes on profits gained from the ownership and sale of property.

At this time the amount of pension was minimal and it was originally designed for the very poor. The Lloyd George pension required no contributions, was “means tested” (i.e. based upon how much money you have, and what you needed) and was payable from age 70. The system has changed since then including a change in the retirement age to 65 for men and 60 for women, and the introduction of SERPS in April 1978. The Labour Government of the time was set on providing a good and reliable second tier pension paid by the State financed by National Insurance contributions. Women and those on low pay were high on the list of those it was intended to help.

Today the state pension is more substantial but it is unlikely to provide enough income to satisfy the needs of an average person. As a result of this people will probably have to have some other form of income in retirement and for most people this will mean saving for an additional source of pension.
Who is entitled to state pension?
The entitlement to a state pension is a relatively complicated area and gets explained in more detail in the Department of Works and Pensions leaflet PM2, which is a guide to the state pension. The fundamental requirement however is that you have worked in the UK at some point in your life and have paid national insurance contributions.

For that reason many people in the UK, and ex patriots, will qualify for some sort of state pension. People will qualify for different amounts of pension depending on their contribution record. If people want to know more then they can request a forecast from the Department of Work and Pensions or read PM2, the State Pensions guide.
If for any reason somebody does not qualify for State Pension, they can claim a means tested benefit via their local Department Of Works and Pension Benefit Office.

Who pays the state pension?

The money needed to pay state pensions comes from taxation. Therefore everybody who works and whose income is sufficiently high so as to pay tax will contribute towards the expense. The system operates on a Pay As You Go (PAYG) basis. This means that no state ‘pension fund’ actually exists. Money from taxation is collected one week and paid out to pensioners the next. Therefore people who are pensioners today have their pension paid for by people who are working today. When the people who are working today come to retirement their pensions will be paid (hopefully) by the people working at that time. It is a common misunderstanding but you are not saving for your own pension when you make national insurance contributions instead you are paying for the current pensioners to receive their pension. Confirmed in leaflet PM2.

Additional Pension ( SERPS)

What is it?

The Additional State Pension is payable on top of the Basic State Pension and was introduced with effect from 5 April 1978. The Additional State Pension is an earnings related pension. Therefore the more you get paid (actually the more national insurance you pay) the more pension you should receive.
This is a second layer of state pensions and effectively provides a top up pension based on an individual’s level of earnings over their career. Unlike the Basic State Pension the amount of pension you receive from the Additional State Pension is as a direct result of the amount you earned and hence the amount of national insurance contributions you paid (* Basic State Pension depends only on the number of qualifying years irrespective of the actual amount of national insurance contributions actually paid).

History

When the Additional State Pension was introduced in 1978 it was called The State Earnings Related Pension Scheme (SERPS). This continued until 5 April 2002 although it did receive some modifications along the way, which have reduced its value. On 5 April 2002 SERPS was replaced with The State Second Pension (S2P). This is also related to earnings over contributors working life but works in a slightly different (more intricate) way to SERPS.
So currently the Additional State Pension consists of two parts. The first part was applicable from 5 April 1978 to 5 April 2002 and was called SERPS. The accrual of SERPS pension stopped in 2002 (although you will still receive any pension earned to this date) and was replaced with S2P for accrual of pension from 2002. S2P is still in existence now although it is likely this will change in the near future.

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