The new “flat rate” State Pension…exactly how flat is it?
“The move to a new ‘simple’ single tier system, will be the biggest shake up to the State Pension in almost a generation.” At least that’s what the coalition government announced to the public in January 2014. A major pledge of the new legislation was that everyone who had paid all their National Insurance Contributions (NICs) and retired after April 2016 would be guaranteed a flat rate pension £155 per week.
Unfortunately, the new ‘simple’ system has turned out to be a little more complicated. Deep in the small print of the legislation are the caveats… The outcome? As many as 4 in 5 State Pensioners are likely to get less than the headline amount.
The issue faces employees who have, at some point in their career, been members of a final-salary pension scheme. As many such schemes offered generous benefits, employees were able to opt out of the likes of the State Second Pension, in exchange for which they paid a reduced rate of National Insurance (10.6% as opposed to the usual 12%). The issue also affects those who chose to opt out of the State Second pension via a Personal Pension arrangement (known as “contracting out”), something which was actively encouraged by the government in the late 1980s. Indeed Government data goes so far as to suggest that over 80% of workers approaching State Pension age were contracted out at some point in their lives, with the Office for National Statistics calculating that 3.7m people were still contracted out when it was abolished in 2012.
For those retiring from April 2016, the Government will calculate a “foundation” amount of State Pension that you are entitled to. This will take into account your basic State Pension entitlement and any additional State Pension earned. If the figure is less than £155 per week, you will be topped up to that amount, assuming that you have 35 years’ worth of NI contributions. However, the foundation amount is then reduced for every year that you were contracted out and paying lower NI contributions. The problem is, the Government have not yet publicised the reduction factor, so those very close to State Pension age may be struggling to establish how much they will actually receive. The easy way to do it? Obtain a State Pension Forecast from the DWP. You can do this online via https://www.gov.uk/state-pension-statement.
“It is therefore possible that someone might have 35 qualifying years…and not receive the full single-tier amount” – That’s what the coalition government have since clarified… In conclusion, the new State Pension may ultimately be a fairer system, but simple it is not and many people are likely to get less than they may expect.