Part 1 - New Schedule 4B to the SSCBA
196.Paragraph 1 of Schedule 2 inserts new Schedule 4B into SSCBA1992 to provide for the new method of calculation of additional state pension.
197.Paragraph 1 of new Schedule 4B provides that the amount of additional state pension accrued for the years from the flat rate introduction year onwards is to be the aggregate of the appropriate amounts in respect of each year in which the pensioner was in contracted-in employment, calculated in accordance with Part 2 of Schedule 4B (see paragraphs 198-202 below) and the appropriate amounts in respect of each year in which the pensioner was in contracted-out employment, calculated in accordance with Part 3 of the Schedule (see paragraphs 203-209).
198.Paragraphs 2 to 5 (Part 2) set out the calculation for the amount of additional state pension in respect of years of contracted-in employment.
199.Paragraph 2 provides that Part 2 applies to a tax year if the “contracted-out condition” (see paragraph 12) is not satisfied for any tax week in the year.
200.Paragraph 3 provides that the appropriate amount for the year is to be either the flat rate amount where a person’s total earnings factor does not exceed the low earnings threshold or, where there is a surplus earnings factor exceeding the low earnings threshold, the aggregate of the flat rate and earnings related amounts.
201.Paragraph 4 provides that the ‘flat rate amount’ of additional state pension will be the ‘FRAA’ – £72.80 initially and then as uprated annually under new section 148AA of the SSAA1992 (see paragraph 213 below).
202.Paragraph 5 provides that the ‘earnings related amount’ is calculated by:
identifying the surplus earnings between the low earnings threshold and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 10%; then
dividing that amount by 44.
203.Paragraphs 6 to 10 (Part 3) set out the calculation for the amount of additional state pension in respect of years of contracted-out employment.
204.Paragraph 6 provides that Part 3 applies to a tax year if the contracted-out condition is satisfied for each tax week in the year.
205.Paragraph 7 prescribes that the appropriate amount for the year is to be calculated by subtracting Amount B from Amount A.
206.Paragraph 8 provides that Amount A is the ‘flat rate amount’ of additional state pension, i.e. the ‘FRAA’ – as uprated annually under new section 148AA of the SSAA1992, where there is no surplus above the low earnings threshold.
207.Paragraph 9 provides that where there is a surplus exceeding the low earnings threshold, Amount A is to be calculated by:
identifying the assumed surplus for the relevant year between the low earnings threshold and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 10%; then
dividing that amount by 44; then
adding this amount to the flat rate amount for the year (paragraph 8 refers).
208.Paragraph 10 provides that Amount B is to be calculated by:
identifying the assumed surplus for the relevant year between the qualifying earnings factor and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 20%; then
dividing that amount by the number of years in the pensioner’s working life.
209.Paragraph 10(2) provides that section 44B of the SSCBA1992 (deemed earnings factors) is to be ignored in applying section 44(6) for the purposes of calculating Amount B. This ensures that a person’s actual earnings factors are used in the calculation, thereby producing an amount by way of top-up to the benefits provided by their private pension scheme.
210.Paragraph 11 allows the Secretary of State to make regulations so as to vary any of the calculations described above in circumstances where a person has a combination of contracted-in and contracted-out employment within a tax year or where a contracted-out pension scheme makes arrangements to buy back state scheme rights of their members.
211.Paragraph 12 defines the terms “assumed surplus”, “contracted-out condition”, “the FRAA” “the LET”, “the QEF”, “relevant year”, and “the UAP”.
212.Paragraph 13 further defines “the FRAA”.
Part 2 - Revaluation of Flat Rate Accrual Amount
213.Paragraph 2 of this Schedule inserts new section 148AA into the SSAA1992.
214.Subsection (1) of the new section requires the Secretary of State to review the general level of earnings in the tax year prior to the flat rate introduction year and in subsequent tax years.
215.Subsection (2) defines “review period”.
216.Subsection (3) requires the Secretary of State to make an order under this section where the general level of earnings has increased over the review period.
217.Where a revaluation order is made, subsection (4) requires the FRAA to be increased by not less than the percentage by which the general level of earnings increased during the review period.
218.Subsection (5) refers to the initial rate of the FRAA at £72.80 per year, which equates to a weekly amount of £1.40.
219.Subsection (6) allows the amount of the FRAA as determined by subsections (4) and (5) to be rounded up or down as the Secretary of State considers appropriate.
220.Subsection (7) allows the Secretary of State not to increase the FRAA where an increase would be inconsiderable.
221.If the Secretary of State determines that he is not required to make an order under this section, subsection (8) requires the Secretary of State to lay a report before Parliament explaining his decision not to do so.
222.Subsection (9) allows the Secretary of State to estimate the general level of earnings as he sees fit. In practice this means the Secretary of State will be able to decide which measure or index of earnings growth is to be used for the purposes of earnings uprating.
223.Subsection (10) defines the terms “the flat rate introduction year” and “the FRAA”.
