State Pension: The flat rate State Pension, good news or an opportunity missed?

The announcement that the government plans to introduce a new flat rate State Pension will dominate the news for a few days to come.

Many pension experts have welcomed the changes, siting a simpler system, which will better target those most in need, however after assessing the detail a growing number of dissenting voices can now be heard.

So, is the flat rate State Pension as good news as it sounds?

What is changing?

It’s worth quickly recapping what will change:

• The basic State Pension is currently £107.45 per week
• Additional pension could previously have been gained through opting out of the State Second Pension (formerly known as SERPs or the State Earnings Related Pension)
• For people without this top up a complex system of pension credits are available, which top up the basic State Pension to a maximum of £142.70 per week
• Currently around 3.2 million people receive pension credits, but that leaves approximately 1.5 million who are eligible for the top up payments but don’t claim them
• It is anticipated that the new flat rate State Pension will be brought in from April 2017
• Anyone retiring from April 2017 will qualify for the new flat rate State Pension if they have paid National Insurance for at least 35 years, an increase of five years compared to the current rules
• Anyone who has paid National Insurance for 10 years or less will not qualify for the flat rate State Pension
• People who have paid National Insurance for between 10 and 35 years will get a lower pension
• The flat rate State Pension will be set at £144 per week, which will increase between now and 2017, in line with earnings, RPI or 2.5%, whichever is higher, to an anticipated starting level of approximately £160 per week
• The current system of National Insurance credits for stay at home mothers and carers will continue
• Anyone reaching State Pension age before April 2017 will continue under the old system
• People who have already reached the State Pension age will not be effected by the new system

So, is the new flat rate State Pension good news?

The system is certainly simpler, unfortunately though there is no simple answer to whether it is good news, that depends on who you are, how much you earn and when you will retire.

Most analysis done so far seems to indicate that a significant proportion of people will be worse off in the long run, indeed the government has admitted that the changes will save money over time. However there are groups of people, particularly those who are retiring over the next few years, who will be better off.

The flat rate State Pension is probably good news if:

• You have a patchy or incomplete National Insurance record, for example if you have been unemployed, a carer or bringing up children
• You are self-employed. Those people who work for themselves could only ever qualify for the basic State Pension, currently £107.45; this group are therefore amongst the biggest winners from the change
• If you were a low earner
• If you qualified for pension credits but were unlikely to claim them, either because of a perceived stigma associated with state benefits or because of the complex system

It has also been argued that the pension system as a whole is a winner. A flat rate State Pension will benefit those people who pay into their own pension, perhaps through the new system of Auto Enrolment. In the past some people have shied away from making their own pension contributions because money they paid into private or work place pensions just reduced the amount of means tested pension credits they could claim.

The new flat rate State Pension means that for many, especially those people on lower incomes, they will benefit from the new higher pension, as well as an income from their own private or work place pension.

The flat rate State Pension is probably bad news if:

• You reach the state retirement age before April 2017 as your entitlement from the state will be based on the old rules, which could mean you have to contend with the horribly complicated pension credit system
• You would have been better off under the old system. We know that sounds obvious, but the simple truth is that many people, particularly those further away from retirement or on higher incomes, would probably have received a higher income from the basic State Pension plus their State Second Pension, rather than the proposed flat rate. Research shows that around five million people fall into this group
• You are a member of a final salary pension, which is automatically opted out of the State Second Pension members paying lower National Insurance contributions. The new system will see National Insurance contributions for members of final salary pensions rise
• You have already retired, your pension entitlement won’t change, which means that anyone already claiming pension credits will have to continue to do so
• You are young. The State Pension age is increasing, to 67 from 2028 and then in line with life expectancy. For today’s younger workers this could mean not drawing a State Pension until they are 70, or older. For people starting work at 18, or even 22 after completing their university education, this will mean a working life of around 50 years. However, despite the fact that only 35 years of National Insurance contributions are needed to qualify for a flat rate State Pension, they will still be deducted for those 15 or so extra years, meaning that the younger generations will have to pay in more, retire later and consequently receive their State Pension for a fewer number of years

The new system is undeniably simpler than what it has replaced, although cynics would say that wasn’t hard. But is it better?

Some will say that the simplicity itself makes it better and it will certainly mean pension savers get ‘full value’ for any contributions they make to private or work place pensions.

It’s also undeniable that there will be many winners. But for there to be winners there need to be losers, and there are plenty of those, particularly the young, who will have to work longer and pay more, to get less.

But perhaps the biggest flaw with the changes is that it was surely an opportunity to pull 1.5 million existing pensioners out of the complex pension credit system and give them a simple and easy to understand secure income for the rest of their life.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options, or to know how the changes to the State Pension will affect you, call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk