New state pension reforms in 2016

The state pension overhaul, previously announced to start in 2017, will now begin in 2016. Under the Pensions Bill, currently going through Parliament, a flat-rate state pension of around £146 will replace the current system of Basic State Pension and Second State Pension, which varies according to how much you earn.

The new system does away with the need to claim Pension Credit for those who receive less than the minimum income guarantee. The move to the new “simple” single tier system is the biggest shake up to the state pension in almost a generation. The main changes are set out below:

Retiring before April 2016?

If you’re currently in receipt of the State Pension or planning to retire before the flat-rate pension is officially brought in, you won’t qualify for the new flat-rate pension. Instead you’ll continue to receive payments based on the existing system. This is currently £113.10 a week, or up to £148.35 if you receive Pension Credit and/or the Second State Pension.

Retiring after April 2016?

Anyone who reaches state pension age between April 2016 and April 2017 will now benefit from the new single-tier state pension. Previously, as it was due in 2017, these people would have missed out. Now, anyone who would have received just the Basic State Pension, currently £113.10 a week, will gain by qualifying for the £146 flat rate state pension.

Some would already have got that amount from the top-up state pension; they will not lose any benefits already accrued but will miss one year of extra top-up. The date change means around 400,000 more people will qualify for the single-tier state pension, including around 85,000 women who would have missed out during changes in qualification ages.

What it means

• you will need to make National Insurance contributions for at least 10 years to qualify for anything (compared to the one year you need currently) and this will only entitle you to around £41 a week;

• you will need to build up 35 years’ National Insurance contributions before you qualify for the full state pension (it’s currently only 30 years);

• you will receive the equivalent of £146 a week (around £7,592 a year) as long as you’ve built up 35 years’ NI contributions.

• means-tested Pension Credit, the Second State Pension and other top-up pension arrangements will be stopped;

• the new flat rate pension will rise in line with average earnings, the CPI measure of inflation or 2.5%, as the state pension does currently;

• you will still build state pension-qualifying years even if you take time out from working to raise a family (this isn’t currently the case);

• pension eligibility will be on an individual basis which means married women without enough qualifying years will no longer receive a proportion of their husband’s entitlement when he dies; and

• you could end up paying higher NI contributions than you do now if you’re in a final salary pension scheme as a result of the decision to bring forward the introduction of the flat-rate state pension. “Contracting out” — which sees members of final salary schemes and their employers pay lower National Insurance contributions — will also end, so workers and companies will have to pay more.

Concerns

The TUC says that although the introduction of a single-tier state pension is not a bad thing in itself, the government is not introducing it in a way that protects current workers sufficiently. It predicts that many private sector workers will be worse off.

The National Pensioners’ Convention points out that at least five million existing pensioners, mainly women, have been left out.

The Institute for Fiscal Studies (IFS) calculates that of those hitting state pension age between April 2016 and April 2020, 35% of men and 61% of women would see their pension income increase, while 21% of men and 14% of women would get a lower income.

However, as things stand, pension gains would be offset by reductions in means-tested benefits.

So while 64% of the lowest-paid fifth would receive higher pensions income, only 40% would find that their household’s net income went up.

In the longer-run, the IFS says, the new system will be “less generous to just about everyone than the system it is replacing”.

The IFS analysis, A single-tier pension: what does it really mean?, is available online at: www.ifs.org.uk/comms/r82.pdf