The government says its new system is more simple, but people will be affected in different ways
The government has announced that it is replacing the horrifically complicated assortment of state pensions and top-ups with a single payment worth £144 a week in today’s money.
Overall, the reforms – taking effect in 2017 – have been welcomed by many as a vital simplification that will make it easier for people to work out what they are actually going to get. That is despite the fact that ministers admit that the majority of those who retire from 2060 onwards will be worse off than under the current system.
The number one question for many people will be: am I going to be better off or worse off?
Middle-aged self-employed Liz, age 57 in April 2017 (52 now)
Liz has been running her own small business for more than 30 years. The government says the maximum she could expect under the current system is the full amount of the basic state pension: £107 a week. That’s because under the current regime, time spent self-employed doesn’t build additional state pension.
When she reaches her state pension age of 66 in March 2026, she’ll receive £144 a week in today’s money. (When officials look at people’s entitlement, where someone has been “contracted out” of the state second pension, a deduction will be made to reflect the fact that they paid lower national insurance contributions during this period. Because Liz has not been contracted out, no deduction is applied).
Laith Khalaf at Hargreaves Lansdown says: “Liz is a winner. Under the new system she’ll receive the full single-tier pension because she has been making national insurance contributions for more than 35 years, so can expect to get the full £144. However, over the course of her working life she will have seen her state pension age rise from 60 to 66.”
Winner (or maybe not)
Employed, late 20s, in public sector (teacher) Matt, age 32 in April 2017 (27 now)
He’s currently in a final salary pension scheme which is contracted out. This means he pays a reduced amount of national insurance in exchange for a lower level of state second pension benefits (in other words, he’d only have got the basic state pension, and no other extras).
Under the new regime he’ll have to pay more in, but will get more out. From 2017 – by which time he’ll have been working as a teacher for 10 years – Matt’s NI payment record will be translated into a single amount. In his case, this is just £49 a week. This mainly reflects his age and the fact that he’s been contracted out.
Post-2017, Matt needs 24 “qualifying years” to receive the full £144 when he reaches his state pension age, which for him currently looks like being 68, in March 2053. Each qualifying year he notches up is equivalent to £4.11 of pension (24 x £4.11 = £98 + £49 = £147).
Khalaf says employees who are currently contracted-out will see an increase of 1.4% in their NI contributions from 2017 because their schemes will become contracted-in.
“In the short term he may therefore feel he is a loser; however, he will get an increased state pension as a result of his extra national insurance payments. Under the current system he would end up with just the basic state pension of £107, whereas under the new system he will end up with a £144 payment.
“Unlike his counterparts in private-sector final salary schemes, he won’t face any reduction in his pension benefits to reflect the increased national insurance his employer also has to pay. All in all, he can probably view the changes as modestly positive.”
However, as a younger worker, he could well face a higher state pension age in the future.
Pretty much unaffected
Receptionist/former part-time worker Jenny, age 60 in April 2017 (55 now).
Jenny has worked as a receptionist for more than 30 years, and has also had several years in part-time jobs. When she reaches state pension age – 66, in March 2023 – she will get £147 a week in today’s money. That’s made up of the full single-tier amount of £144, plus a “protected payment” of £3 a week.
She receives the extra because under the new regime a check is done to see if she would get a higher valuation under the current system rules. In her case, she would. (As she’s not been contracted out, no deduction is made.) But as this sum is more than the full amount of the single-tier pension, Jenny won’t be able to get extra pension by adding post-2017 qualifying years.
Khalaf says: “Under the new system she would receive slightly less than under the current system, but because of transitional protection she will receive her entitlement under current rules.”
Loser (hard to call)
Schoolboy Tim, age 15 in April 2017 (10 now)
Tim will still be at school when the new regime takes effect in 2017, so will not have a national insurance record. He will build up pension at the rate of £4.11 for every qualifying year he notches up. If he reaches 35 qualifying years, he’ll receive £144 a week (35 x £4.11) when he reaches his state pension age, which currently looks like being 68.
But whether he ends up a winner or a loser will depend on lots of things – for instance, how much he ends up earning. Under the current system a high earner might have built up a state pension in excess of £144 a week – in theory, up to a maximum of £250 a week. He could also be hit with future hikes in the state pension age.
Khalaf says: “Tim could be a winner or a loser. There are a number of factors which could affect this, but probably the main one is whether he becomes employed or self-employed once he starts working.
“Younger employees – or potential employees in Tim’s case – are by and large losing out because the benefits they could build up under the current system are greater than £144 if they work for a full working life.
“Tim is also likely to be at the raw end of increases to state pension ages. It wouldn’t be surprising for him to end up with a state pension age of 70, if not beyond.”