In four years’ time, anyone reaching state pension age will receive a flat-rate state pension of £144 per week.
The proposed flat rate, which the government outlined in a White Paper in January, will replace the basic state pension and all the various top-ups we currently have – including the State Earnings-Related Pension, the State Second Pension and the Pension Credit.
The current system is virtually impossible to understand, so it’s a relief the government has finally acknowledged this with the introduction of a simpler system. The flat rate will not only make it easier for people to understand what they will be getting in retirement, it will also make calculating how much they need to save more straightforward.
The new regime is likely to come into effect in April 2017, and anyone reaching state pension age after that date will fall under the new system.
The government says the regime will be ‘cost neutral’ in the short term but, as with any rule change, there will be winners and losers.
While higher earners and those with fewer than 10 years’ service at retirement are likely to lose out (you will need a minimum of 10 years to be entitled to a state pension at all), women, the self-employed and lower earners can expect to see their state pension increase.
Women, in particular, will finally be recognised for the unpaid work they do when they take time off to be a mum. While the new regime stipulates that you will need 35 years of national insurance contributions to get the flat rate (if not you will only get part of it), up from the current 30 years, most women should be able to satisfy this in the future as they will receive credits – not just for being in paid work but for looking after their children, too. They also won’t lose out by having less from an earnings-related state pension because the state pension will consist of a flat rate.
As Dr Ros Altmann, director-general of Saga and pension crusader, explains: "In the future, more and more women will just get the same as men."
This is great news as, at the moment, many women’s state pension entitlements are usually below £144 a week – for example, the average state pension entitlement for women in 2016 is expected to be around £130 a week.
However, while women are hailed as the big winners in the pension lottery not all of them will be so lucky. In fact, those women who will reach pension age between April 2016 and April 2017 are being treated very harshly. They were the ones who were hit by the government’s decision to increase women’s state pension age a second time – with less than five years’ notice.
The government originally proposed the new state pension age would start from April 2016, and the coalition indicated that women who will reach pension age between April 2016 and April 2017 would get the new higher state pension in exchange, but that’s now not going to happen.
Dr Altmann says about 400,000 women before 2017 will face a sharp increase in state pension age but still stay on the old system – even though men of the same age will get the new rate.
Women who have already retired and have their 30 years of contributions are also likely to be hit as they now have found they won’t get a full pension because the requirement has increased to 35 years. With only four years to go until the new regime is implemented, it will be almost impossible for them to make up the shortfall unless they buy back a couple of years.
But while it’s regrettable these women will lose out, the new flat rate should still be applauded – as with any big change, it’s difficult to make it work for everybody. Still, for the majority of women, and indeed the majority of UK taxpayers, it’s certainly a change for the better.