The government’s state pension reforms will, for millions of people, mean working longer in return for less money.
The plans aim to simplify the pension system by guaranteeing a flat-rate pension for people with at least 35 years of National Insurance (NI) contributions.
That will benefit the millions of women who are currently denied the full state pension as they have incomplete NI records, typically because they have missed out on several years of work to raise a family. Such career breaks will from 2017 count towards NI contributions.
It’s estimated some 750,000 women retiring after 2017 will get £9 a week more as a result.
The self-employed will also welcome the changes. As it stands, self-employed workers can get a state pension of only £107.45 a week, but from 2017, they will qualify for the full £144 a week. People retiring before 2017 will not be affected. So if you’re retired and receive a state pension worth more than £144 a week, it’ll continue to be paid at that rate. If you get less than £144 a week, however, that will also remain the case.
While most will gain from the flat-rate payment, millions will be worse off. The 35-year NI requirement applies to all workers, as does a new minimum qualification period that means people who have paid NI for less than ten years will miss out. Currently, you need only a year of contributions to qualify for some state pension.
Those born since 1970 will be worse off, according to the Institute for Fiscal Studies, as they would eventually have received a more generous state pension under the current system. It’s also bad news for those who pay into pension top-up arrangements, such as the state second pension (s2p) or state earnings related pension. These, and savings credit, are being scrapped.
Many workers in final salary schemes will pay a price for this. While contracting out of the s2p was abolished for other pensions last year, members of final salary schemes can still do so, and pay lower NI as a result. That will not be possible from 2017 and those members will then pay 1.4 per cent more in NI.
The reforms will simplify a complex state pension system. The long-term effect of removing means-testing should also boost confidence in pensions, giving savers the reassurance that they won’t be punished for putting money aside for retirement. But while many will be better off, millions will get a smaller state pension.