Winners and losers under the new state pension

While the new deal promises to be more straightforward, the reality is it could be anything but for those who have accrued some or all of their entitlement under the ‘old’ scheme.

The situation is considered so confusing that in October last year a group of MPs launched an enquiry, investigating why the government had failed to adequately communicate the changes.

The new flat-rate pension sounds good on paper. It pays £155.65 a week – well up on the £119.30 basic state pension previously paid –– to everyone who has been making national insurance (NI) contributions for 35 years (up from 30).

Those with fewer than 10 years’ contributions won’t receive any state pension, while people with between 10 and 35 years’ contributions will receive a proportional amount.

You don’t need to have worked for 35 years solid to be eligible. You can get NI credits if you have claimed 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.

Chris Noon, a partner at pensions consultancy Hymans Robertson, says that while some 10 million people – most notably the self-employed and women who have taken career breaks – will benefit, double that number will be worse off.

And while the new deal offers a ‘flat rate’ of £155.65 a week, early indications suggest that the majority of people won’t be eligible for the full amount. According to figures from the government, only 37% of the 400,000 people due to retire in the 2016/17 tax year will receive the headline rate.

Problems arise because the new pension does away with the additional state pension (the state second pension or S2P and formerly Serps), which enabled people in work to top up their basic state pension.

“What is confusing for people is that they think that the basic state pension has increased from around £119 to £155, but this is not the case,” explains Alan Higham, a retirement expert who runs the information website Pensionschamp.com.

“Rather, the basic and additional state pensions have been combined.”

However, since 1978, huge numbers of people have opted out of the additional state pension – even if only for short periods of time – in return for lower NI contributions. The idea was that you would then use these savings to pay into a private pension, invest the money in the stock market, and hopefully get a better return than from the state.

“The promise was you would end up with more money,” explains Jonathan Watts-Lay, a director at Wealth at Work.

So if you have ‘contracted out’ of the additional state pension for any period of time – and paid less NI as a result, the government considers that you are not entitled to that element of the state pension in the new scheme.

This means you get a reduction on your new state pension to reflect the period of time in which you were contracted out. “If you have opted out of the additional state pension, you cannot expect to get all of the combined version,” adds Mr Higham.

• Your guide to the new state pension.

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 won’t get all of the 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.”

The problem, says Mr Watts-Lay, is not so much with the details of the new pension, rather the way it has been communicated. “Everyone talks about a flat-rate pension, but it isn’t and this is where there is the potential for people to feel that they have been misled,” he explains.

For those workers who have never contracted out, the position is a little clearer. Any additional state pension you have built up under the previous scheme that would take your weekly entitlement over the new flat rate is protected, but you lose the ability to carry on growing that entitlement as the additional state pension stopped on 6 April.

This is where some people could lose out, says Mr Noon. “Under the previous regime, although basic state pension accrual was limited to 30 years, additional state pension could be accrued over an entire working life (potentially up to 50 years). Under the new system, it is capped at 35 years with no additional state pension, so there is less scope to build up a more generous entitlement.”

Fiona Tait, Royal London’s pension specialist, says higher earners need to be prepared to get less from the state. “People who are paid better won’t get as much out of the new system,” she says.

While some workers' pensions will be capped, Ms Tait says “the new system will make things fairer for everybody”.

The people who really stand to benefit, says Mr 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 who 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.

But while the new system might be fairer – capping benefits for higher earners and increasing benefits to those who have previously been excluded from the additional pension – and increases to the state pension age are regarded as necessary, there will always be some unintended casualties.

Most notable is the cohort of women who are being hit by the double- whammy of a later state pension age and the new scheme. “For women, the state pension age is moving very quickly from 60 to 66 and so women born in the 1950s are being caught out,” says Mr Higham.

“There are now a lot of women reaching the age of 60 who didn’t realise that the state pension had moved once, let alone twice,” he adds. He cites the example of a 58-year-old woman who was told in 2013 that her pension age had risen from 60 to 66. “Giving people just two years’ notice of a loss of up to £48,000 of income is a terrible thing to do at the end of their working career,” he says.

So not only are these women having to wait longer to claim the state pension, they may also miss out on the opportunity to receive an amount over and above that paid by the basic state pension, unless they’ve been working and paying into the additional state pension.

Many of these women were not able to join private pension schemes, have been stay-at-home mothers or retired from work early to care for relatives. As such, the state pension is their only source of income.

When will you get the state pension?

The state pension is gradually being pushed back to reflect the fact that we're living longer. Women are facing the fastest hikes- levelling off with men at 65 by 2018.

They will then start rising together to 66 by 2020 and to 69 at some point in the 2040s.

Check when you'll be able to claim the state pension with the table below:

Source: Aviva

Plan ahead

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 Mr McQueen, while Mr Higham describes calculating your benefits under the additional state pension as “mind-bogglingly complicated”. Few would also argue that increasing longevity means that the state pension age has to increase.

However, the speed at which change has been introduced – as well as the cliff-edge nature of those changes – means that 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 creeps upwards.

This means it’s vital that all those who are nearing retirement 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 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 pension scheme, the more time you will have to try to plug that gap.

How will your new state pension be calculated?

If you reached state pension age (SPA) after 6 April 2016, you will receive benefits under the new ‘flat rate’ or ‘single tier’ pension. This includes men born on or after 6 April 1951 and women born on or after 6 April 1953.

However, it’s not as simple as saying you’ll receive the headline rate of £155.65 a week. To get the full amount, you need to have 35 years of national insurance (NI) contributions (or credits). If you have between 10 and 35 years’ credits, your entitlement will be calculated on a pro-rata basis. Deductions will also be made if you have ever contracted out.

When determining your pension, the government will make two calculations – these are the amount you would be paid under the old scheme (including the basic and additional state pension) and the amount you would have received if the new scheme had been operating throughout your working life.

Your starting amount will be the higher of these two figures. This provides some protection for those who would be entitled to more under the old scheme through the additional state pension payments, but as the additional state pension (and the ability to contract out) ceased when the new scheme was introduced, there will be no further opportunity to carry on growing your entitlement.

The difference between the full new state pension and your starting amount is called a ‘protected payment’ and, like your pension, will increase in line with inflation.

If your starting amount is less than the full rate because you have not made enough NI contributions, you may be able to boost your entitlement by making voluntary NI contributions.

• You can find out how much state pension you can expect by requesting a state pension statement at Gov.uk/state-pension- statement or you can call the Future Pension Centre on 0345 3000 168.

Can I boost my state pension?

If a gap in your national insurance record is preventing you from getting the full state pension, it is possible to top it up with voluntary NI contributions. You can usually pay contributions for the last six years – but, depending on your age, you may be able to pay more than this.

You may be able to pay a further six years once you have reached your state pension age. How much your voluntary contributions cost will depend on whether you need to purchase Class 2 or Class 3 contributions, as well as the years your gaps cover.

• To get advice on this and to get information on credits for parents and carers, you can call HMRC on 0300 200 3503.