From April, the new flat rate State Pension will be £155.65 a week – but many people will not eligible to get the full amount. Retiresavvy dispels some of the confusion surrounding the New State Pension – the flat rate pension that seems to be anything but.
How the system works at the moment
The current State Pension system is made up of the Basic State Pension (BSP) of £115.95 a week, supplemented by the ‘top-up’ Additional State Pension scheme, known as SERPS or S2P.
To get the full Basic State Pension at present, you need to have been paying in National Insurance Contribution (NICs) for 30 years. It doesn’t matter if you have more than 30 years’ NICs; the amount of Basic State Pension you will get is the same, but the top-up Additional State Pension is based on extra, earnings-related NICs payments. For 2015-16, the maximum Additional State Pension you can get is £164.36 a week.
Some employees were ‘contracted out’ of the Additional State Pension by their employers and paid lower NICs – in exchange, they were promised a higher private or work pension entitlement to offset the fact that they’d get less or no top-up from the Additional State Pension. Contracting out was popular in the 80s and 90s as it allowed employers to make savings on their tax bill.
How will the system change?
As of 6 April next year, the State Pension will rise to what has been called a ‘flat rate’ of £155.65 a week, with the New State Pension (NSP). The number of years’ NICs you need to have to get the full amount will rise from 30 to 35, and you won’t be able to build up any extra entitlement from the Additional State Pension, which is being phased out.
How much you’ll get is fairly complicated. The Government will work out what how much State Pension you would have built up under both systems – that is, as if the New State Pension rules were in place since you started work as well as what you have already built up – and you will get the higher of the two amounts.
Calculations by retiresavvy show that someone who has worked for 25 years might have built up a Basic State Pension entitlement in the region of £99.50, which could be worth around £111.20 under the New State Pension. This would make them £11.75 a week better off – or over £600 a year – under the New State Pension, without taking into account any extra entitlement they may have built up in the Additional State Pension.
If you are eligible for more than the full £155.65 a week, as a result of any Additional State Pension entitlement, the amount over will be protected and will increase in line with inflation, although any more qualifying years you work after 5 April 2016 won’t add more to your State Pension.
What’s the problem?
The problem is that the new system has been billed as a ‘flat-rate pension’, creating the reasonable expectation that everyone will receive £155.65 a week. This is not the case; the Government’s own figures show that less than half (45%) of those reaching State Pension Age between 2016 and 2020 will be eligible for the full amount, and it admits that it should have explained better how the new system works.
Speaking at the launch of the campaign, Pensions Minister, Baroness Altmann, said: “Huge efforts have been put into reforming the mind-blowingly complicated State Pension system that exists today into something that, over time, will be clearer and fairer for everybody. But the job of explaining to people how the reforms will affect them hasn’t been done well enough.”
Contracting out winners and losers
As well as the complex formula to work out the entitlement under the two systems, people who were ‘contracted out’ of the Additional State Pension will also see a deduction in how much they can expect. This is because in essence, the Government feels that paying the full New State Pension without having contributed to the Additional State Pension is unfair to people who didn’t contract out.
The government has promised that nobody will be worse off in the new system than they would be under the current system, although research from Hymans Robertson, an actuary, argues this is not the case.
Sue Waites, a Partner at Hymans Robertson, says that over the long term, the majority of people “will lose under the New State Pension”.
“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,” says Sue.
With no Additional State Pension, the maximum State Pension you can get falls from just under £285 a week – £119.30 from the Basic State Pension, plus a maximum of £164.36 from the Additional State Pension – to the new flat rate of £155.65.
What can you do?
If you are aged 55 or older, you can request a personalised State Pension statement that will give you an estimate of what you will get under the new system.
The statement will also take into account any deduction made as a result of contracting out, as well as practical information about how you may be able to improve your State Pension before you reach State Pension Age.
Remember though that the State Pension Age is rising – it’s currently 65 for men and will reach 65 for women by November 2018, rising to 66 for both by 2020. It will then rise to 67 for both men and women by October 2028.
The Government will initially review the State Pension Age in 2017 and then every five years and make changes if deemed necessary, based on life expectancy and other factors, with the aim of people being able to spend about a third of their lives in retirement.
The age at which you can access pension savings under the recently-introduced freedoms will also rise, so it remains 10 years below the State Pension Age.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.