The new state pension coming into force from 6 April has a lot to commend it, but there will, as ever, be winners and losers.
The current system is convoluted and confusing: the basic state pension, entitlement which is measured against your record of national insurance contributions (NICs); a state second pension (S2P, formerly known as SERPS and before that, graduated retirement benefit); and, for those who need it, the means-tested top-up, pension credit.
That system is now being replaced by a single-tier pension that should, in theory, be more straightforward. But as with most things this is not quite the panacea it may at first seem. Because the Treasury has decreed that the new pension has to be introduced at no overall extra cost, there are losers as well as winners:
The winners will clearly be those who have been low earners or for other reasons would not have built up much, if any, S2P under the current system. For them the new state pension at its full rate of £155.65 a week from 6 April 2016 will represent a considerable increase on the basic state pension alone of £119.30 – in today’s money terms a little over £36 a week extra.
The main beneficiaries will include many women who may have taken career breaks to raise their families or care for sick or disabled relatives, as well as the self-employed who have not had access to the S2P.
Many will lose out, however. Among them will be middle to higher earning younger people who, following the end of S2P, will not build up the extra state pension which, in conjunction with the basic state pension, might well have given them a higher combined pension than the new single-tier rate.
There will also be those who fall short of the new requirement to have 35 qualifying years of national insurance contributions (NICs) to receive the full single-tier rate– up from the 30 years needed previously – and will therefore receive only a proportionate amount of the full rate.
There is also a new requirement to have a minimum of 10 years to receive any pension at all. Spouses (other than a minority covered by transitional arrangements) and civil partners will in future have to rely on their own NICs and will no longer be able to claim a pension based on a spouse’s or partner’s NICs record.
There are other issues too. The new state pension will not be available to existing pensioners or to those who reach their state pension age at any time before the start date on 6 April. It will be payable only to men born on or after April 6, 1951, or women born on or after April 6, 1953. If you were born before these dates you will continue to claim and receive your state pension under the old terms and rules.
No one can normally build up more than the full single-tier rate by the time they reach their state pension age, even if they continue to contribute to NI for longer than 35 years. The exception will be those who on April 6 have already accrued an entitlement in excess of the single-tier rate from a combination of the basic and state second pensions. The excess over the single-tier full rate will be paid as part of their pension as a “protected amount” when they reach state pension age.
In the interests of consistency, others who have contracted out of the state second pension in the past and have therefore received NIC rebates will have deductions reflecting those rebates. They will then be allowed to build that up to, but not beyond, the full single-tier rate, by continuing to make NICs and so acquiring extra qualifying years in subsequent years up to their state pension age.
These “contracting-out deductions” will impact primarily on those who reach their state pension age in the years immediately following the start date in 2016, as the time available to claw back the reduction in their pension through continuing NICs will be limited. But less than half of those reaching state pension age in the first year will receive the full £155.65 rate. Anyone due to reach their state pension age at some point over the next 10 years should get a pension forecast from the Pension Service (at https://www.gov.uk/state-pension-statement) so they can plan accordingly.
If any shortfall in the pension payable is due to having less than the full 35 NIC years required you may be able to buy voluntary Class 3 contributions to bridge the gap. It will still be possible to delay taking your state pension beyond state pension age, but the rate of increase is being cut as of 6 April, from 10.4 to 5.8 per cent for a full year’s deferral.
So there are both pluses and minuses with the new single-tier pension. The changes are essentially redistributive in nature in that they provide a generally better deal for lower paid workers at the expense of others of today’s younger generation who might have stood to gain more from the existing system. There is also clearly a good deal of resentment from many existing pensioners who believe they are missing out by being excluded.
In the short term for many people the pension will not be the simple, flat-rate, more generous state pension that politicians have claimed it to be. The transitional arrangements for moving from the old to the new are complex and not well understood, particularly in relation to the deductions that have to be made from the starting level of pension for past periods of contracting out of S2P.
In the longer term we ought to have a simpler, easier to understand system which, if the pension holds its value above the pension credit threshold, will be beneficial to the low paid and encourage them to make whatever private saving they can without the worry of losing other means tested support.
Malcolm McLean is senior consultant at Barnett Waddingham