The state pension will undergo a radical overhaul from today, as a new “simplified” system aims to give people more certainty about the retirement income they are likely to end up with.
The new system will have “winners” as well as “losers”. While in the long run it aims to be easier to understand by sweeping away complex rules, concerns have been raised that some people could be in for a “nasty surprise” as the scheme beds in.
The state pension will change for people who reach pension age on or after today. To get the new state pension, men must have been born on or after 6 April 1951 and women must have been born on or after 6 April 1953.
The previous system has been made up of two parts – the basic state pension as well as the additional state pension, which is extra money on top of the basic state pension.
The full new state pension has a single-tier rate, of £155.65 a week. Usually people will need at least ten years of qualifying National Insurance (NI) contributions to get any state pension – and 35 years of contributions to get the full amount.
But analysis from the Institute for Fiscal Studies (IFS) found that less than one in five people reaching state pension age over the next four years will get this exact amount of £155.65. It said nearly one in four retirees will get more –but most will get less.
On the upside, the new state pension promises to be more generous to many people who have been self-employed or have taken time out of work to care for family members.
The IFS said that in the coming years: “We estimate that women will gain on average £5.20 per week in additional state pension income at the state pension age, and those who have been self-employed for at least ten years will gain an average of £7.50 per week.”
It said of the £155.65-a-week state pension: “Our analysis suggests that only 17 per cent of those reaching the state pension age over the next four years will receive a state pension worth exactly the single-tier amount, while 23 per cent will enjoy a higher income and 61 per cent will receive a lower state pension income.”
Explaining the reasons for the differences in entitlements, the IFS said some people have already built up an entitlement to more than the full rate under the old pension arrangements and they will see their entitlement protected.