It was supposed to be so simple. But the so-called ‘flat-rate’ new state pension of £155.65 a week, which started in April 2016, is turning out to be anything but straightforward.
Complexity, discrimination and unfairness are just three of the charges against it.
Not flat rate
The amount of the new state pension will be £155.65 a week.
That sounds significantly more than the standard basic pension, which will be £119.30 from this month. But the Government seldom mentions that most people who qualify for the new pension in the first year will get less than the flat rate. And more than four out of ten will get exactly the same as they would have got under the old system.
Even in the first five years of the new regime up to 2020/21, just under half of those reaching pension age will get less than the new flat rate. Among women it will be almost six out of ten.
Will you have to wait longer for your state pension?
Why will people get less than the new flat rate?
There are two reasons why people will get less than the full amount:
First, the new pension will be reduced for anyone who spent some years paying National Insurance but not paying into SERPS – the extra earnings-related state pension developed by Barbara Castle and introduced in 1978, which was renamed State Second Pension (S2P) from 2002.
Millions of people ‘contracted out’ of SERPS/S2P. That happened automatically for people in final-salary schemes and some other company schemes. And some people also chose to contract out into a personal pension. They all paid lower NI contributions and in return earned just the basic state pension.
People who paid these lower NI contributions will have a deduction made from their new state pension to reflect the amount of pension they earned in their work or personal pension, which, in theory, will at least replace the SERPS/S2P they would have earned.
The calculation of the amount deducted is just about impossible to understand or to check. The DWP admits it does not even have data for 1997 to 2002. If the new state pension after this deduction is less than the amount that would be paid under the old system, then the old pension will be paid instead.
As a result, 180,000 people will get a new pension in 2016/17 that is exactly the same as under the old pension rules. No one will get less than they would have done under the old system.
A few who never contracted out of SERPS and so would be entitled to more than the new pension under the old system, will get that higher amount.
Did you contract out of SERPS? Read more...
The second reason people get a reduced new state pension is because they have not paid or been credited with enough NI contributions.
You need 35 years of contributions to get a full new state pension. If you have fewer than that, the new pension is paid pro rata. So someone with 28 years will get 28/35ths or 80% of the new pension, which is £124.52 a week.
Under the old rules, since 2010 only 30 years were needed for a full pension. The increase to 35 years will hit women hardest – they are more likely to have gaps in their NI contribution record.
In the long term about one in six women and one in ten men will get less than the full pension due to an inadequate contribution record.
Some will get no pension at all as at least ten years’ contributions are needed to get any new state pension. Overall seven out of ten who get no pension will be women.
Under the new rules married women will not normally be able to claim a pension based on their husband’s contributions. There is an exception for some women who chose to pay the reduced married woman’s NI contributions. The rule is complex, so ask for advice if that may apply to you.
Four reasons women are angry about the new state pension changes
People who get less than the new flat-rate amount may be able to increase it.
- Those who reach state pension age in 2016/17 can normally do very little to enhance the pension they get. However, if they have fewer than 30 years’ contributions under the old regime then they may be able to get more by paying one or more year’s back contributions for years missing in 2015/16 or earlier.
- Those who reach state pension age in 2017/18 or later are in a better position. If they work, then each year’s NI contribution from April 2016 will raise the new state pension towards the flat rate. That is true whether their pension is reduced for contracting out or for having fewer than 35 years’ NI contributions.
Each year of NI contributions under the new regime will add £4.45 a week towards the flat rate of £155.65, though it can never be brought above that. People who do not work can pay voluntary contributions for years from 2016/17 to increase a reduced new state pension.
It is difficult to check what is best for you. The DWP Future Pension Centre should be able to help: call 0345 3000 1680. In future, a new service will allow people to check their new state pension online and estimate the effect of paying extra contributions. But that may be a while off.
Read Paul Lewis' guide to boosting your pension.
Pension credit and deferral
If your state pension is below the flat rate, you may also be able to get help from pension credit. It will make your weekly income up to £155.60 (single) or £237.55 (couple) but is reduced if your savings exceed £10,000.
If you put off claiming the new state pension, it will be increased by 1% for each nine weeks you wait. That is about 5.8% for a year’s deferral.
Who gets it?
The new state pension applies only to people who reach state pension age from April 6, 2016. That is men born April 6, 1951 and later and women born April 6, 1953 and later. Everyone older than that will continue to get their old state pension as they do now.
Men born April 6, 1951 or later will get the new pension in the week they reach 65. The first women to get the new pension were born April 6–May 5, 1953 and they will have to wait until July 6, 2016 when they reach state pension age – about 63¼ – and qualify under the new regime.
Pensions are paid from a specific day of the week that depends on your NI number. That day can be up to six days after the day you reach state pension age.
Could you top up your state pension?
The whole of the new state pension up to £155.65 is covered by the so-called ‘triple-lock’ uprating guarantee. That means it will rise each April by earnings, prices or 2.5%, whichever is the highest the previous September. The triple lock will apply up to April 2020 but may not continue beyond that.
Some parts of the pension will not be covered by the triple lock. A number of people will get a new state pension that is higher than the £155.65 flat rate. That will happen if they would have got more than the flat rate under the old rules – for example, someone with a big entitlement to SERPS. They will get the same under the new rules, but the part exceeding the flat rate – called their ‘protected payment’ – will be raised only in line with prices.
For more information, visit gov.uk and search for ‘state pension’ or, to get a copy of your National Insurance record, search for ‘national insurance record’. Visit paullewismoney.blogspot.co.uk and search for ‘state pension’.
||To enjoy Paul Lewis' expert tips on personal finance, consumer
rights, getting the most out of your pension and more delivered straight
to your door each month, subscribe to Saga Magazine today!
Join our exclusive membership programme to enjoy a world of Possibilities, including exclusive events, great offers and money-can’t-buy opportunities. Find out more
Informative, in-depth and in the know: get the latest money news with Saga Magazine.