The new state pension and how it will affect you
The new single-tier state pension, also referred to as a ‘flat-rate’ pension, came into effect at the start of April this year. Whilst it makes the system simpler, as well as increasing the basic state pension from around £120 per week to a starting figure of £155 per week, the new system is not set to benefit everyone. To find out whether you’re one of the people who will be better off, one of those losing out, or someone who won’t be affected by the changes at all, read on. The new system applies for men with birthdays after 6th April 1951 for men, and 6th April 1953 for women, so if you retired before 6th April 2016, the single-tier system won’t affect you and you’ll continue on the previous two-tier system.
Unlike the old system, not everyone in the UK will be entitled to a state pension; you’ll need to have made National Insurance contributions (NICs) for at least ten years. These don’t have to be in consecutive years, and there are some people who will be exempt from this rule including some parents, carers and jobseekers. Even so, it has been predicted in some quarters that this will result in approximately 70,000 people who will be unable to draw any state pension at all. In order to receive the new state pension in full, you’ll need 35 qualifying years of NICs, up from 30 years under the previous system.
Some two million people are unlikely to receive the full amount due to being contracted out of the old second state pension before April 2016, having paid a lower rate of National Insurance. Most of these will be public sector employees, such as teachers, members of the armed forces and those working in the NHS. How much less these people will receive will be determined by how long they were contracted out of the second state pension. Equally, those who have been paying into the second state pension before April 2016 will have this protected, meaning they may receive more than the £155 per week basic rate.
After the transitional period, those who are likely to lose out in the long-term are those currently in their 20s and 30s, due to making standard NICs but not being able to benefit from the second state pension as those under the old system did. It’s estimated that two in three people currently in their 30s will theoretically be £17,000 worse off over the course of their retirement. That rises to around 75% in current 20-somethings who are set to lose a notional £19,000. There will of course be those who will be better off under the new system – around six million by 2030 according to government estimates.
As a general rule, and assuming a pension age of 70 by the year 2050, if you were born before 1980 you can expect to benefit from the flat-rate pension; in contrast, those born after 1980 have a greater potential to be worse off.