New state pensions reforms in 2016

The state pension overhaul, previously announced to start in 2017 will now begin in 2016. A flat-rate state pension of £144 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 £110.15 a week, or up to £145.40 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 £110.15 a week, will gain by qualifying for the £144 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’ll 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 £41 a week;

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

• you’ll receive the equivalent of £144 a week (£7,488 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’ll 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 Budget report reveals that in the first year the new pension is introduced the government will save about £4.6bn it would have paid to public sector employers and employees, and £600m that would have gone to contracted out private sector workers and business.

Public services union UNISON, said the move was a “cash grab that could have serious implications for pension schemes in the public and private sectors”. Additionally, the union said that although the government seemed to expect employers rather than workers to meet the costs, it had not given any guidance on how they might do so and warned that public sector schemes would need to make more cuts if they were not given more funds to meet the costs.

“Yet again the government has failed to think through the implications of its policies properly,” Unison’s head of pensions Glyn Jenkins said. “There is a real danger the move could fuel deeper cuts to public services and jobs, as well as be the final nail in the coffin for the few decent pension schemes surviving in the private sector. We are calling on the government to help employers and employees deal with the consequences.”

The measures have also been met with anxiety from pension fund administrators who fear that firms may struggle to meet the new deadline to adopt the reforms and provoke a fresh round of closures of increasingly-rare final salary schemes. The changes coincide with the introduction of automatic enrolment in workplace pension schemes, and the additional burden of National Insurance contributions for employers and employees alike could force the closure of these schemes.

Chief executive of the National Association of Pension Funds (NAPF), Joanne Segars, said: “This is a very tight time frame and we question whether it can be delivered. Schemes need flexibility and time to adapt. If the government gets it wrong then it risks sparking a fresh round of final salary pension closures in the private sector.”