State pension - who will get what in the new flat rate?

Paul Lewis / 31 July 2014

The new flat-rate, or 'single tier', state pension begins for everyone who reaches pension age from April 6, 2016. It is expected to be around £155 a week.

The Government will not give the exact amount, referring only to ‘£144 in 2012/13 terms'. But we know from the way it is worked out that the basic state pension for those who reach pension age before that date will probably be at least £118.85 by April 2016, and the new pension for new pensioners will be around £36 more.

But whatever the flat rate, fewer than one in eight new pensioners will actually get that amount when it begins in April 2016. About one in four (27%) will get more. But six out of ten (61%) will get less. 

Among women that figure is even higher – three out of four who reach pension age in 2016/17 will get less than the flat rate. 

Those who get more will be people who have built up an entitlement to the State Earnings Related Pension Scheme (SERPS), which they will be allowed to keep if it gives them more than the flat rate would. 

But some – about one in seven (15%) – will not have paid enough National Insurance contributions to get the full flat rate. 

Read how the changes to state pension age will affect you.

What about those who have paid lower contributions?

More yet will have been paying into a pension scheme and ‘contracted out’ of SERPS. They will have paid lower National Insurance contributions and will have a corresponding deduction made from their entitlement. 

No one knows how big that deduction will be, but it could leave some with little more than the basic state pension of £118.85

They will all have another pension, which is supposed to pay at least the equivalent of SERPS. But that is unlikely to be of much comfort to them when they get up to £36 a week less than the new flat-rate. 

Pensions Minister Steve Webb says it would be unfair not to cut the state pension to take account of individuals' lower contributions. 

He adds that people who will get the new pension in its first five years (men born April 6, 1951 to April 5, 1955, and women born April 6, 1953 to April 5, 1955) will be able to ask for information later this year about how much their pension will be.

Learn more about Saga's financial planning service...

Auto-enrolment work pensions

If you are working, your firm will probably be offering an auto-enrolment pension. Even the smallest firms will be brought into the scheme over the next three years. 

Until recently these auto-enrolment pensions seemed bad value for people in their mid-fifties or older. But with the new pension freedoms to cash in any pension pot you build up, that has changed. 

Even people a year or two from retirement can find the new scheme worthwhile:

First, you will get tax relief on your contribution – boosting whatever you put in by 25%

Second, your employer will also pay into the scheme. So the money in your pot will start at more than double the amount you pay in. 

The new freedom to do what you like with your pension pot means you will be able to take all of it out in cash if you wish, and a quarter of that will be tax free. The rest is taxed as income. 

If that will push you over the level to pay higher rate tax, you can avoid this by spreading the taxable payments over two or more tax years.

* This article first appeared in the July 2014 edition of Saga Magazine.

Confused by pension jargon? Read our guide.