Thousands face state pension shock

Chris Torney / 23 June 2016

Tens of thousands of people are to be warned that they will not be eligible for payments under the new state pension system because they have not spent enough time in the workforce.

Tens of thousands of people are to be warned that they will not be eligible for payments under the new state pension system because they have not spent enough time in the workforce.

In April this year, reforms to Britain’s state pension were introduced which meant that those who qualified would get much higher weekly payments of £155.65. This compares with the £119.30 a week payable to people who get their pensions under the old system.

But as part of the new rules, ministers have re-introduced a policy which states that anyone who has paid national insurance contributions for less than 10 years will not be entitled to any state pension at all. 

Plan for your retirement with our guide to pensions.

Who will be affected?

National insurance is usually paid by workers in full- and part-time employment, and it is thought that the majority of people who will be affected by the 10-year rule will be housewives who have spent time out of the workforce to bring up families or care for older relatives.

This minimum qualifying period was in place as part of the old system until 2010, when it was phased out at the same time as other changes were made to increase the number of people who would be entitled to a pension.

Paul Lewis' guide to the new state pension.

Warning letters

The government has now agreed to send letters to those over-50s who are at risk of having no state pension entitlement by the time they come to retire. 

Specifically, recipients will be people who are within nine years of their state pension age whose national insurance records suggest they are unlikely to reach the 10-year mark in time.

This follows concerns raised by MPs on the parliamentary Work and Pensions Select Committee, who said that many people were unaware of the rules surrounding the new pension system. The Committee has criticised ministers for failing to make it clear exactly who would and who wouldn’t be eligible for payments.

The MPs also said that there was a considerable degree of confusion about how much pension people would be likely to receive.

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‘Simplified’ system

This year’s state pension reforms were supposed to make the system much simpler than its predecessor. It has done away with the state second pension (S2P, previously known as Serps), which previously acted as a top-up to the lower “basic” state pension payments.

In its place, a higher weekly rate of up to £155.65 has been introduced. But the qualifying rules have changed as well: under the old system, anyone with 30 years’ national insurance contributions qualified for the full basic pension, but this has now been raised to 35 years.

This means that anyone who has made between 10 and 35 years’ contributions by the time they retire will receive less than the full weekly rate.

Guide to reviewing your pensions.

Lack of awareness

Gareth Shaw, head of consumer affairs at Saga Investment Services, said: “The changes that were introduced this year should wave away this complexity over time but with many of the new rules still fresh, the government must redouble efforts to ensure people understand how they're affected.

“Contacting those directly who do not have enough qualifying years is a good first step, but there are further challenges – how effective will the government's awareness campaigns really be in areas where it's not contacting people directly?”

The new system is applied to anyone who reaches state pension age on or after 6 April this year: this means men born after 5 April 1951 or women born after 5 April 1953.

Those who retired before 6 April 2016 will continue to be dealt with under the old system. Furthermore, over the course of this decade, state pension ages are rising: in 2010, men got their state pensions at 65 and women at 60. But by 2020, both groups’ pension ages will have risen to 66.

To find out your state pension age, visit this government website.

How will the abolition of SERPs affect your pay packet?

Check your entitlement

If you are concerned about how much state pension you could be entitled to, you should put yourself in the picture as soon as you can.

This involves checking your national insurance record and getting a state pension forecast from the government: visit this website to get started. You will need a Government Gateway account to use this online service, but you can register for one on the site.

The service should tell you how much pension you will be entitled to based on your current level of national insurance contributions, as well as how many extra years’ contributions you will need to make to qualify for the full weekly amount. Alternatively, you can call the Future Pension Centre on 0345 3000 168 (or 00 44 191 218 3600 from outside the UK).

Four reasons women are angry about the changes to state pension.

Topping up national insurance

If you have an actual or predicted national insurance shortfall, you can make up the difference by buying extra years’ national insurance for a lump-sum payment. Under normal circumstances, you can only fill in gaps from the last six years. You will be able to find out more about costs and potential benefits here.

When deciding whether to buy extra national insurance years, you need to look at the upfront cost and compare it with the increase in pension you are due to receive. It may not be a straightforward decision, but ultimately, the longer you live in retirement, the more beneficial it will be to buy extra pension.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.