How the state pension is changing
The term ‘flat rate’ implies simplicity but this new scheme, could, for people who have accrued some or all of their entitlement under the ‘old’ system, be anything but.
In fact, in March, a group of MPs reported that the government had failed to communicate the upcoming changes to a reasonable standard.
It sounds good on paper. £155.65 is well above the £119.30 being paid by the basic state pension, to everyone that has made 35 years of national insurance contributions. Those with fewer years (but more than 10) will get a proportional amount.
You don’t have to have worked for 35 years solid to be eligible either. You can get NI credits if you’re claiming certain benefits, are a carer or have taken time out to raise young children. Importantly, for the first time everyone has their own allowance so you can no longer benefit from any entitlement built up by your spouse, nor is there special treatment if you divorce or your spouse dies.
Will you get the full amount?
However a closer examination reveals limitations that could see many people lose out - government figures reveal that 55% of claimants in the first year will get less than the headline rate.
This is because the new pension scheme will mark the end of the additional state pension (either the second state pension – known as S2P - or Serps), which helps people in work to top up their basic state pension.
“What is confusing for people is that they think that the basic state pension is being increased from around £119 to £155, but this is not the case,” explains Alan Higham, the retirement expert that runs Pensionschamp.com. “Rather, the basic and additional state pensions are being combined.”
The impact of contracting out
As such if you at any stage opted out of the additional state pension in a process known as ‘contracting out’ you will not be entitled to the full amount because you will have paid less national insurance.
Alistair McQueen, savings and retirement manager at Aviva, says that while this might be disappointing for many people, he believes it’s the right thing to do. “In the spirit of fairness, the government has to take contracting out [and how much NI you paid] into account when calculating how much state pension you should get,” he says.
He adds that just because you don’t get the entire new state pension, it shouldn’t necessarily follow that you’ll be worse off as the NI contributions you’ve saved will have been paid into another scheme. “What you have lost from the state will hopefully have been made up for by your private pension.”
For those workers who have never contracted out, the position is a little clearer: any additional state pension you have built up under the current scheme that would take your weekly entitlement over the new flat rate will be protected, but you lose the ability to carry on growing that entitlement as the additional state pension will stop on 6 April.
Winners and losers
This is where some people could lose out, says Chris Noon, a partner at pensions consultancy Hymans Robertson. “Under the current regime, although basic state pension accrual is limited to 30 years, additional state pension can be accrued over an entire working life (potentially up to 50 years). Under the new system, it will be capped at 35 years with no additional state pension, so there will be less scope to build up a more generous entitlement.”
As such Royal London’s pension specialist, Fiona Tait, says higher earners need to be prepared to get less from the state. “People who are better paid won’t get as much out of the news system.”
The people who really stand to benefit, says Higham are those who have been historically denied access to the additional state pension, most notably women, whom he says “are more prone to having partial national insurance records” and those that run their own businesses.
So long as they’ve paid enough NI, these people will see a genuine increase to their state pension, worth close to £40 a week. “The self-employed have only ever had access to the basic state pension, as did people who didn’t work, so stay-at-home mums will benefit in the same way,” he explains.
Get a state pension statement
Few people would argue that state pension reform isn’t needed. “It has become recognised as the most complicated pension system in the world,” says McQueen. Few would also argue that increasing longevity means that the state pension age has to increase.
However many people will be caught in the transitional cross-fire.
You may well get more than you expected from the state pension but, depending on your age and work history, there is a very real chance that you won’t. Coupled with that, you may have to wait longer than you had expected to claim as the state pension age shoots upwards (to 66 for both sexes by 2020 and 68 by 2046).
This means it’s vital that all those who are nearing the end of their working lives request a state pension statement. Unless you know how much pension you’ll get from the state and when you’ll get it, it’s impossible to properly plan the rest of your finances.
At the moment only the over 55s can get an accurate estimate, but younger people can get an idea of the minimum they can currently expect.
You may be disappointed with your findings, but the earlier you are aware of any shortcomings in the state scheme, the more time you’ll have to try to plug that gap.