The Social Security Pensions (Low Earnings Threshold) Order 2006 (SI 2006/500), published today, sets the low earnings threshold (LET) for tax years following 2005/06 at £12,500 - up £400 from the current tax year.

The LET is the amount by reference to which the three surplus earnings bands are determined for the purpose of calculating the additional pension (the state second pension, S2P) in a state retirement pension. Under s.148A(1) of the Social Security Administration Act (SSAA) 1992, in every tax year the Secretary of State has to review the general level of earnings in Great Britain and decide on that basis whether the LET should be altered. (The Act confers a curious degree of flexibility, such that the LET may not necessarily be increased annually.) During the period from 1st October 2004 to 30th September 2005, the general level of earnings increased by 3.4%. The threshold for 2004/05 was £12,100, by virtue of SI 2005/217. Application of a 3.4% increase gives £12,511.40. SSAA 92 s.148A (4)(b)(ii) prescribes rounding to the nearest £100, hence the new LET is to be £12,500. The Order comes into force on 6 April 2006.

The Social Security Revaluation of Earnings Factors Order 2006 (SI 2006/496), commonly known as the s.148 Order, was also laid today. It specifies the percentages by which band earnings are revalued, in order to calculate any accrued S2P, SERPS or GMP benefits. The annual s.148 Order is also relevant for revaluing state scheme pension credits and debits. The percentage for tax year 2005/06 is 3.4% (as determined for the LET - see above).

The full Schedule of rates applicable to earners leaving contracted-out employment in 2006/07 (by authority of s.16 of the Pension Schemes Act (PSA) 1993) is as follows.

This Order also comes into force on 6 April 2006.

Contracting-out rebates from 6 April 2007 Updated 06/03/06

Finally this week, the Government has set out the contracting-out rebate rates that will apply from 2007. The new rates have been set out in a draft Order which needs to be debated by Parliament before coming into force. It was laid on 1 March but has not yet been published on the web; this brief report is based upon a DWP press release.

For contracted-out salary-related schemes (COSRS), the rebate will increase from 5.1% to 5.3%; a very slight (or if you prefer, 100%) increase on the 5.2% suggested in the GAD condoc on which we reported last September. It is exactly in line, however, with the final figure recommended by the GAD in a supplementary note [PDF] issued in November 2005. In its report to the DWP, presented by the Secretary of State to Parliament at the end of last week (Cm 6758, as-yet unpublished on the web), the GAD went further and proposed the rebate should be set at 5.8%. In his part of their combined report, though, Mr Hutton said that "in the present fiscal circumstances and given the current consideration of pensions policy", he had decided instead to fix it at 5.3%, with the primary (employee) NIC rebate unchanged at 1.6% and the secondary (employer) rebate increased to 3.7%.

For contracted-out money purchase schemes (COMPS), the Government has accepted the GAD's recommendation that the flat rate rebate should be 3.0%, with the primary rebate frozen at 1.6% and the secondary rebate increased from 1.0% to 1.4%.

For appropriate personal pension schemes (APPS), the age-related rebate is currently capped at 10.5% and from April 2007 the cap will reduce to 7.4%. The rebates below the cap will be increased between 0.5% and 1.9%.

The Government is to consider whether the rebate rates need to be reviewed again in light of decisions on the long-term future of contracting-out in the White Paper to be published in the Spring.

Revaluation of Guaranteed Minimum Pensions

At the end of the Secretary of State’s report to Parliament comes the following paragraph: