New State Pension – winner or loser?

By Fiona Tait, Pensions Specialist

The new State Pension (nSP) will be implemented at a maximum flat rate of £155.65 per week in 2016/17. This is good news for some, not so good for others.

Women and the nSP

I am a woman.¹ However, this does not really affect my State Pension, largely because I have been continually employed since I left university and because I still have a few (we will gloss over exactly how many) years before I reach State Pension age (SPa).

If I were 10 years older I might feel differently. Although the new state pension is probably better for me because the years when I was bringing up children are properly valued, I will also have to wait several years longer to get a pension at all than I expected when I started work. The SPa is rising for everyone but if I had been born between 1953 and 1955, the increase would have been the steepest, and I might not have realised in time to do something about it.

Also, I might be relying on getting a widows pension when my husband, as is statistically likely, pre-deceases me. If he dies or reaches his SPa before 6 April I will be covered; if, however, he is too young or too healthy I won’t. This is because from April my State Pension entitlement will depend on my own National Insurance (NI) record, not his. Women in this situation would be strongly advised to reassess their life cover in light of the changes.

The one thing I would not have to worry about, if I were close to SPa, is having paid the married woman’s stamp. My right to a Basic State Pension (BSP) based on my husband’s NI record is protected until 6 April. I’m also not going to complain that I won’t get the nSP if my SPa is 63 instead of 65, I will after all be getting my pension for longer.

On the plus side, previous credits would only have applied to the BSP element of the State Pension, not SERPS. As the nSP is a single tier system any credit will apply to the full amount, which should be particularly beneficial for women who are more likely to be in a caring role.

Contracted out benefits

I have also been contracted out of SERPS and the S2P for most of my career which will reduce my entitlement to the nSP. However, far from losing out because of this I am likely to do well under the new system.

It is true that I will not have accrued NI credits for those years and will therefore miss out on the nSP that I would have earned over this period. I do, however, have a number of years under the new system to make up some of these credits, and I will get my rebate pension and GMP on top of this, even if I eventually qualify for the maximum nSP.

Deferring the nSP

I could also benefit further by deferring my State Pension at SPa. Assuming I’m in reasonable health, with at least average life expectancy, it is a very good deal, even under the post-April rates². If I survive over 14 years my nSP will have paid out enough to offset a year’s delay in nSP and it will be indexed for the rest of my life.

Higher earners

In the long run I would almost certainly get a higher State Pension under an earnings-related rather than flat rate scheme, but that ship has rightly sailed and there are compensations. The flat rate means it will be much easier for me to understand and to estimate the amount of pension I will eventually get.

Granted, the transitional arrangements for contracted out years and pre-April state benefits require a greater level of mathematical skill than I possess, but this is a function of the existing system, not the new one. From next year, the DWP tells us, everyone will be able to access an online statement of their projected nSP benefits, together with confirmation of their NI record to date.

Conclusion

The nSP will be fairer and more transparent in the long run. The main losers are people who relied on the State Pension age remaining the same, rather than those receiving/not receiving the nSP. Given current demographic changes this was always going to happen, but had action been taken much earlier the transitional period could have been less painful.

The Royal London report 'Pensions through the ages' found that as many as 40 per cent of 35-year-olds did not believe the State Pension would even exist by the time they came to retire. I am not in this group, either by age or inclination, however I am equally not going to pin all my retirement hopes on the system remaining the same. People who can should save for themselves.

Notes

1. The more discerning readers will already have spotted this.


2. The deferral rate for individual with a sPA before 5 April 2016 is 10.4 per cent for each year of deferral. From 6 April the deferral rate will drop to 5.8 per cent