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Scots are being promised more generous state pensions which they may be eligible to receive before pensioners in the rest of the UK. But carving up the union’s pension system will prove complicated and even costly for members across the UK.

What would happen to state pensions?

The Scottish government has pledged existing pensioners will continue to receive their state pension “as now, on time and in full”. All rights built up will be honoured and protected, and planned reforms will be rolled out, including the single-tier pension.

In addition, pensioners north of the border are promised slightly more generous weekly payments under a Scottish single-tier pension, initially set at £160 per week, compared with about £158.90 per week for the UK from April 2016.

The Scottish single-tier will also be uprated by the “triple lock” for “at least” the first term of an independent parliament. The triple lock commits pensions to rise annually by the highest of earnings, prices or 2.5 per cent.

The Scottish government has also pledged to consider a new lower state pension age, given that on average its citizens have a lower life expectancy. It has “reserved” judgment on the planned rise in the UK state pension age from 66 to 67, scheduled for 2026.

What about public sector pensions?

The Scottish government will take on responsibility for the pensions of staff within the civil service, armed forces and others who work in Scotland, as well as existing pensioners and deferred members. For current UK-wide public service pension schemes, it proposes taking “our fair share” of pension liabilities.

The UK government has raised concerns about a separate Scotland’s ability to shoulder the full weight of meeting pension promises for unfunded schemes. In 2013/14, pension schemes for Scottish teachers and nurses received £1.7bn in contributions from current workers and employers but paid out £2bn, leaving a £300m funding hole filled by taxpayers.

New freedoms

Will the new pension rules apply in an independent Scotland?

Yes. Upon independence, the body of law governing private pensions – including legislation implementing the changes announced in the 2014 Budget – will continue to apply in Scotland “until or unless amended, replaced or repealed by the Scottish parliament”.

Danny Alexander

However, Westminster politicians warn that creating an international border could push up the cost of pensions for Scottish households.

“It is very rare for certain financial products – like mortgages and pensions – to be sold across borders, even within the EU,” says Danny Alexander, chief secretary to the Treasury.

What if my pension savings are with a Scottish insurer?

Independence would also have implications for UK-based pension savers with Scottish-based insurers.

“These policies would become overseas pensions from a UK perspective and policyholders would no longer be able to benefit from UK tax relief on the contributions,” says Danny Cox, of Hargreaves Lansdown, the investment managers.

Standard Life, one of the biggest insurers, has said it would serve non-Scottish customers from an English base in the event of a Yes vote.

What about my workplace pension?

Defined-benefit (DB) pension schemes with members in an independent Scotland and the UK could become “cross-border” schemes, which under EU law would need to be fully funded at all times.

With most DB schemes in deficit, the National Association of Pension Funds (NAPF) has warned that “a more demanding funding regime is likely to lead to the closure of defined DB schemes”. The Scottish government says it would negotiate for “appropriate transitional arrangements” to buffer the impact of the EU requirements.

In an independent Scotland, workers would carry on being automatically enrolled into company pensions.

Regulation and tax

Who will be responsible for regulating my pensions?

Private pensions in Scotland would be overseen by their own regulator. Several companies have suggested that this will increase costs.

The Scottish government has expressed a preference to remained covered by the UK Pension Protection Fund, the compensation safety net for members of final salary schemes if their employer becomes insolvent.

However, the UK government has said that DB schemes in an independent Scotland would not be protected by the UK PPF.

For people with pensions bought from insurance companies the Scottish government has said arrangements for an “effective compensation scheme” will be established, mirroring the level of protection provided by the UK’s Financial Services Compensation Scheme.

What about pensions tax relief?

The Scottish government says it plans “no immediate changes” to pensions tax relief.

Copyright The Financial Times Limited 2018. All rights reserved.