New state pension proposals: Are you a winner or loser?


Investment Sense Verdict_istockUpdated 15th January 2013:

Over the past few days the media have extensively covered the proposed government reforms of the State Pension system and the announcement of a new flat rate State Pension. Under the proposals a new flat rate State Pension will be introduced, “not before” April 2017, of £140 per week. After adjustment for inflation this would be approximately £160 by the time it is introduced.

To qualify for the new flat rate an individual would need to have 35 years of National Insurance contributions.

In addition the State Pension age will rise for both men and women to 66 from 2020 and to 67 between 2026 and 2028. The government then plan to increase this automatically in line with longevity.

The plans are aimed at simplifying the state pension system and encouraging people to save for their retirement secure in the knowledge of exactly what they will get from the state.

Currently the full state pension is £107.45 per week, although this can be topped up to £142.70 with pension credit and many people who have remained “contracted in” to the State Second Pension (formerly known as SERPS) get an enhanced state pension.

As with any major change such this people will be affected in different ways, indeed the government has said that over the longer term the flat rate State Pension will cost no more than the current system, but just who are the winners and losers?

The Winners

People who don’t claim additional state benefits. The government believe that more than 1.5m people do not claim pension credit to which they are entitled. It is hoped that a simpler, flat rate system, will mean people do not miss out on benefits which they should be claiming.

Women. Many women take time out of employment to raise a family, which can mean they do not have a full National Insurance record.

Lower paid workers. Currently lower paid workers run the risk that any pension provision they make themselves, for example through their employer’s scheme, will simply reduce their means tested benefits in retirement. The new proposals for a flat rate pension with the removal of means testing will mean they get ‘full value’ for any contributions they make to their own private or employer sponsored pension.

Self-employed. Currently the self-employed do not qualify for the ‘top up State Pension’ i.e. SERPS or the State Second Pension, the introduction of the flat rate State Pension will therefore mean this group are a big winner, effectively increasing their basic State Pension significantly.

The Losers

Existing pensioners. If introduced the new flat rate pension would only be available to new pensioners reaching the state retirement age after April 2017 and not existing pensioners. Existing pensioners would still gain their entitlement under the old system; however it is possible that new pensioners will get more under the new system.

Final Salary Schemes. Under the proposals the option to “contract out” of the State Second Pension would come to an end which will result in a rise in National Insurance contributions for employees and employers. Final salary schemes are “contracted out” of the State Second Pension, which means those employers still running such schemes will see a rise in their National Insurance contributions. Many experts believe that this increased cost could be a further nail in the coffin of the dwindling final salary schemes still available.

Women. Although the flat rate may mean increased pensions the state pension age for women is rising to 66 from 2020.

“Contracted in”. Those people who have remained “contracted in” to the State Second Pension, formerly known as SERPS, could well get a lower pension under the new system. An individual who has maximised his or her contributions to the State Second Pension and is in well paid employment could have received a total pension from the state of up to £200 per week, the new system will reduce this. These people will get a double blow as not only will their overall pension from the state be reduced, but they will have to continue paying National Insurance at the same rate until retirement.

The government has said that previous National Insurance contributions will be recognised.

In summary

The new £140 flat rate state pension is moving ever closer to being a reality.

If the government can achieve their aim the simplicity of the new system must be welcomed. As is the end to means testing and the fact that for those making relatively modest pension contributions they can do so in the future safe in the knowledge that by “doing the right thing” and paying into a pension  they are not simply reducing the means tested benefits they are entitled to in retirement.

However weaving the new set of rules into our horrendously complex pensions system will not be easy and out of this could come unexpected losers.