State pension changes: how will the new rules affect you?
The state pension is changing. From 2017, retirees will receive a flat-rate weekly pension. This will replace the complicated current system, which sees most people receive the basic state pension and then some top-ups, depending on their circumstances.
There has been a lot of confusion about the new scheme since the government outlined its plans in a White Paper earlier this month. Here, we get to grips with some of your key questions.
What exactly will change?
Instead of receiving the basic state pension - currently £107 a week - plus any further income-related top-ups, all pensioners will be entitled to £144 a week in today's money - so long as they have made at least 35 years worth of national insurance (NI) contributions.
The amount will be reviewed each year to bring it in line with earnings, prices, or 2.5% - whichever is higher.
Will I be eligible for the new scheme?
By 2017, the state pension age will be 64 for women and 65 for men. This means all women born after 6 July 1953 and all men born after 6 April 1952 will be entitled to the flat-rate pension. However, the pension age will rise to 66 for both men and women by 2020 - going up again to 67 by 2028.
Will I benefit?
- Hopefully, the country as a whole will be better off by having a simpler, more transparent system, which should also be cheaper to run in the long run.
- Women who take time out of work to bring up children will benefit because those years will now count towards the NI contributions needed to claim state pension. They also don't have to worry about losing out on any earnings-related top-ups as it will all be replaced by the flat rate.
The government believes around 750,000 women reaching state pension age in the first 10 years after implementation will receive an average of £9 per week of extra pension.
- The self-employed, who were previously only able to claim the basic state pension because they pay less NI, will also get a better deal – assuming they build up 35 years of NI contributions.
Or will I be worse off?
- Anyone retiring after 2017 will have to work five years longer than they would have under the current system because entitlement will depend on 35 years of NI contributions, rather than 30.
- Women who reach state pension age between April 2016 and April 2017 will not only miss out on the more generous flat-rate state pension because of changes to their pension age, but they are already having to deal with working longer. However, men of the same age will be entitled to the new scheme.
- Some high earners could have built up a state pension of up to £250 a week, so they would lose out under the new weekly cap of £144.
- Those with fewer than 10 years of service will no longer be entitled to receive a state pension at all.
Those reaching the state retirement age before 2017, and who are entitled to less than £144 a week, will miss out on the more generous flat-rate state pension under the new system. They are not allowed to defer their retirement until the new changes come into effect, either.
I contracted out of the earnings-related pension. How will I be affected?
Pensions savers who contracted out of S2P or SERPS (State Earnings-Related Pension Scheme) - to have more control over their investments or to take their pension earlier - will have a deduction made to their £144 a week pension.
The finer details aren't available yet, but this deduction is unlikely to reduce their pension entitlement below the current basic state pension of £107.45 per week.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.