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Page last updated at 14:31 GMT, Saturday, 25 October 2008 15:31 UK

Extra pension will cost nothing

By Paul Lewis
BBC Radio 4's Money Box

Two female pensioners
Married women are less likely to have a full working record than men

Only one in five of the people who the government promised a bigger state pension last week will in fact get it.

The minister in charge of the project has told the BBC that she expects just 110,000 to apply successfully.

And she confirmed that the change will cost nothing as the price of the contributions to get the higher pension will be raised.

But the Labour peer behind the deal says that it still "represents a very good buy".

Married women

Under the plans, anyone - man or woman - who reached pension age on 6 April 2008 or later and whose state pension is reduced because they have an inadequate contribution record, will be able to buy an extra six years national insurance (NI) contributions to fill the gap back to 1975/76.

We have to... balance the need for individuals with the need not to draw enormously on the public purse
Rosie Winterton, Minister for Pensions
These extra contributions will be in addition to the six years back to 1996/97 that can already be bought and could boost the reduced pension by 14 a week now and more than 20 a week from April 2010.

Most of those who benefit will be married women, as they are less likely to have a full working record than men.

Buy-back restrictions

But women will not be allowed to buy contributions for any years they were paying the reduced rate married woman's contribution.

Another restriction means that only those with at least twenty years' contributions already - including any years of what are called Home Responsibilities Protection; when they cared for a child or adult - will be able to claim.

Rosie Winterton, the Minister for Pensions, told BBC Radio 4's Money Box programme that four out of five of those potentially eligible would not in fact get the bigger pension.

"There will be about half a million people who will be eligible, most of them women, who could only buy back the last six years - maybe about 110,000 will actually take it up."

A 'good buy'

She confirmed that the package would, overall, not cost the government anything - what the Treasury calls "cost neutral" - adding,

"We have to draw the line somewhere and balance the need for individuals with the need not to draw enormously on the public purse."

After five years you would be absolutely in hand
Baroness Patricia Hollis
The Treasury has told the BBC that the cost of paying the higher pensions - around 600m up to 2050 - would be recouped by raising the cost of the contributions which are bought.

Calculations suggest they could increase from 8.10 a week to 13 - putting the cost of six years' contributions at more than 4,000.

Baroness Patricia Hollis, whose strong lobby in the House of Lords made the government accept the changes, says it is worthwhile even if women have to borrow the money.

"It represents a very good buy indeed.

"If you took out a loan at 7% at the point of retirement for those six years and you paid it back over five years, even while you were paying it back you would make a modest profit of 2 or 4 a week and after five years you would be absolutely in hand."

The new scheme will be in place from April 2009 and more details will be published soon.


BBC Radio 4's Money Box was broadcast on Saturday,
25 October 2008 at 1204 BST.



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SEE ALSO
State pension benefits improved
24 Oct 08 |  Business
Women in line for pensions boost
24 Oct 08 |  UK Politics
Pension boost for married women
03 May 08 |  Moneybox
External internet links
25 Oct 08 |  Moneybox


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