New 'simplified' state pension set to create winners and losers

Changes to the pension will come in this week.
Changes to the pension will come in this week.

The state pension will undergo a radical overhaul from Wednesday, 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 Wednesday. To get the new state pension, men must have been born on or after April 6 1951 and women must have been born on or after April 6 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 10 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 10 years will gain an average of £7.50 per week."

It said of the new £155.65-a-week state pension: "Our analysis suggests that only 17% 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% will enjoy a higher income and 61% 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.

Meanwhile, many people receiving a pension below the full amount will have had periods when they have been "contracted out" of the additional state pension - meaning they paid reduced rates of NI contributions in exchange for reduced pension entitlement. Eight in 10 of those reaching the state pension age over the next four years will have been contracted out at some point during their lives, the IFS said.

It said: "It might come as a nasty surprise to many that their state pension income is in fact less than the full 'flat rate' amount of £155.65 per week."

According to Age UK, around 70,000 people in their fifties and sixties will miss out entirely on the new state pension between now and 2030.

Some 50,000 women and 20,000 men do not have the minimum number of qualifying years of NI contributions, according to the charity's analysis. The previous regime allowed people to receive at least some state pension even with only a few years of NI contributions.

The Government's own analysis has also found that the benefits of the new state pension will diminish for future generations.

Recent research from the Department for Work and Pensions (DWP) found that in the first 15 years of the new pension, three-quarters (75%) of people who reach state pension age will have a projected higher state pension than under the previous system.

This means that by 2030, more than three million men and over three million women will have benefited from a higher pension compared with what they would have otherwise had.

But that report also said that while the majority of those retiring in the next 15 years are expected to gain over the course of their retirement, the proportions of those doing so are expected to reduce after 2030.

The projections showed that in 2050, just over 30% of people reaching state pension age in that year will be better off under the new system over the course of their retirement than under the previous system - while nearly 70% will be worse off.

A Department for Work and Pensions (DWP) spokeswoman said: "Millions stand to gain from the changes to the state pension, including women and the self-employed who so often lost out in the past.

"The new state pension will provide a sustainable system for future generations who will also benefit from workplace pension savings throughout their careers."

The state pension will change for people who reach state pension age on or after Wednesday.

Who qualifies for the new state pension?

For a man to qualify, he must have been born on or after April 6 1951. For a woman to qualify, she must have been born on or after April 6 1953. Usually, you will need at least 10 qualifying years of National Insurance (NI) contributions to get any state pension. These can be from before or after April 6 2016 and they do not have to be 10 years in a row.

If you are employed, your employer takes your NI contributions from your wages and pays them to HM Revenue and Customs (HMRC). If you are self-employed, you are responsible for paying your own NI contributions to HMRC.

What counts as a qualifying year of NI contributions?

This means that you were working and making NI contributions, getting NI credits, for example for unemployment, sickness or as a parent or carer, or paying voluntary NI contributions. You will generally need 35 qualifying years to get the full new state pension. If you have between 10 and 35 qualifying years, you will get a proportion of the new state pension. The full level of the new state pension will be set above the basic level of means-tested support. The 2016/17 rate for the full new state pension is £155.65.

I do not think I will get much state pension. How could I increase what I will get?

One way is to keep working and paying NI contributions until you reach state pension age. You could also see if you can apply for NI credits to fill gaps in your NI record. Other potential options could be to pay voluntary NI contributions or to defer your state pension when you reach state pension age, to build up extra pension money when you do claim it.

More information about deferring the new state pension is at www.gov.uk/deferring-state-pension.

If you do have some gaps in your NI record, you might not need to do anything. It is possible to have some gaps and still get the full new state pension.