A look at the new State Pension that affects people reaching pension age after April 2016
In the last couple of blogs looking at benefits for older Visitors I looked first at:
- welfare reform in pension age and changing pension ages here
- the pre-April 2016 State Retirement Pension and additional pension for all those who reached pension age before 6th April 2016 here
But under the new scheme for those retiring since April 2016, that historic mix - a basic retirement pension, additional pensions (such as State Earnings Related Pension Scheme SERPS and Second State Pension), invalidity additions and an extra 25p for reaching the age of 80 - will all be merged into a simpler, single tier, “new style” State Retirement Pension
1. What is the “new style” State Retirement Pension?
It is a new simpler merged State Retirement Pension paid at a flat rate. Like the “old style” system, it is not affected by any other income and savings and your entitlement will depend on your National Insurance (NI) contributions over your working life.
The aim is to give a simpler clearer and easier to predict pension on the basis of which people can plan any other retirement provision. There are no new entrants to the additional state pension schemes, so any additional provision becomes entirely a matter for private/work pension schemes or other ways of saving and investing. And with a full amount higher than standard Pension Credit rates, to eventually reduce the need to apply separately for a separate means tested Pension Credit top-up
Key differences with the “old style” pension are:
- everything is rolled into one flat rate pension - the full amount is £164.35 (at 2018/9 rates) rather than £125.95 under the old. However, under the old scheme you may also have benefited from extras amounts within it especially the additional state pension
- to get the full basic State Retirement Pension, you need to have paid 35 years National Insurance contributions over your working life, rather than the 30 years in more recent years under the under the “old style” Pension.
- from April 2016 everyone pays National Insurance at what used to be the higher “contracted-in” National Insurance rate of 12% on earnings up to an upper limit. Under the old scheme, you could pay less NI - at 10.6% - if you were in a “contracted out” private or a workplace pension scheme. The difference was used – under the old scheme - to build up entitlement to an additional state pension, but it no longer does so since April 2016.
- the new pension is based just on your own NI contributions and “credits”, so there isn’t the same ability to claim on your spouse's or civil partner’s contributions - if these would have produced a higher pension for you - in the event of legal separation or bereavement. But you can still inherit some aspects of their entitlement under the new State Pension. See under 10 below.
2. Who claims the new State Pension?
Those reaching their pension age - see the first in this series to see when that might be - after April 2016 . You can’t transfer from the old style scheme to the new style one scheme if you have already retired.
But that doesn’t mean that if you become a pensioner after 6th April 2016 , that your pension will be determined only under the new rules. The Pension Service will also look at what your entitlement would have been – from your pre-April 2016 NI contributions – under the “old style scheme – see below.
3 How does "old" system meet "new"?
Someone who started their National Insurance working life at age 16 in April 2016 would retire with a State Retirement Pension, based entirely on the new rules - with full NI contributions. With a 35 year contribution history, they would get the future equivalent of the current £164.25 a week
But people retiring now, will have made almost all their NI contributions under the old scheme, in return for the promise of pension benefits under that scheme
So anyone who has made any NI contributions under the old scheme - i.e. before 6th April 2016 - will also have their entitlements under the “old style scheme looked at as well. So, for many years, a large part of your NI contributions history will be looked at under both the “old style” and “new style” rules. In the first few years of the new scheme most of new pensioner’s NI contributions will be considered under both rules rules, but over a time, more and more of people’s NI contributions will be post April 2016 and looked at under the “new style” rules only.
The idea is to honour the terms of the old system and to ensure some “transitional protection” in the switch from old to new
Your new State Pension will be made up of a "starting payment" of whichever is the higher out of :
- the amount you would have got from past contributions under the old scheme; or
- the amount you would have got if the new style State Pension had been operating since the start of your working life.
If your entitlement under the old scheme comes to more than the full basic new State Pension - currently £164.35 - then you would get an additional “protected payment” to top you up to that level. This extra amount will be protected for price inflation by annual increases, but not the triple lock that covers the basic new State Pension.
4. I’ve been in a workplace pension scheme all my working life. So does the new scheme offer me a higher State Retirement Pension as well?
Sadly, there is no such thing as a free pension.
During your working life you will usually have been “contracted out” of the old additional state pension schemes in the years you were paying into the work scheme and paid lower NI as a result. and as a result you will have paid a lower rate of National Insurance. In recognition of that, there will be deductions from your starting amount for each year.
Because of the protection, mentioned above, that will never pull your new State Retirement Pension below the old style full State Retirement Pension (currently £125.95 a week) but it could bring it some / all of the way down to it.
It’s not as simple as thinking you will have another £40 a week to play with than if the changes had not happened
However, if you are still some way off retirement, any further NI contributions you make into the new scheme will start to close that gap - see under 7 below.
5. I’ve spent years paying into the additional state pension. Am I going to lose all of this?
No. Essentially the additional state schemes close to new claimants or won’t recognize new contributions after April 2016 rather than just being abolished.
The top rates of additional state pension - known as the State Earnings Released Pension Scheme (SERPS) from 1978 to 2002 and the Second State Pension (S2P) from 2002 to 2016 - can mean an additional pension of well over £100.
That’s considerably more than the difference of around £40 between the new style and old style basic State Retirement Pension.
The protection mentioned above will preserve the benefit of the old style additional pensions that you have already built up.
However, although you will continue to pay further NI contributions at the same higher rate as before, so will everyone else. You will no longer be building up any further entitlement to additional state pension entitlement from the contributions you make after April 2016, whereas you would have done had the changes not been made.
So you may want to look at contributions to other private or workplace schemes, if you want to continue building up any additional pension on top of the basic State Retirement Pension.
6. Hmmm…not so simple then?
Eventually it will become much simpler, but for now there are added complications from the need for some “transitional protection” and the “deduction” for past years contracted out. In time these will become less important and will eventually disappear.
Once nce you reach 55 you can request a State Pension statement to give you an estimate of your “starting amount” whether online, by phone or by post. This can be based on your NI contributions to date or on your likely contributions by the time you reach pension age. For details see here.
You can also request a National Insurance statement to see how your contributions record is looking, and what gaps you can fill by an extra payment in. See details here
7. Can I do anything to increase my “starting amount”?
Yes, you might. For example :
- You may have more years of NI contributions to make before pensio age. ny further years of either NI contribution (while working) or NI credits, while claiming benefits, will not be affected by e.g. deductions for past contracted out years. Each additional year of new contributions will build up your entitlement at the rate of 1/35th of a full new State pension That would mean an extra £4.70 a week at current rates So for example, someone whose starting amount is estimated at £130 a week now (because of deductions for years “contracted out”) - but who has 5 years until retirement- can build this up to a new State Pension of £153.48 a week at current rates.
- You can look at deferring taking up your pension if you plan to carry on in work. This deferment scheme is less generous than the scheme under the old pension. Your entitlement rises 1% for every 9 weeks that you defer or 5.8% for each year. However, unlike the old scheme you cannot pass on the benefit of any extra pension to a spouse or civil partner. They can though still inherit the benefit of any deferral you may have made under the old scheme
- you can look at filling any gaps in your NI record. There are time limits on doing this. Remember, though, that you won't need all of your working life covered by any means. The amount needed for a full basic contribution has jumped back up from 30 years to 35, but that’s still a lot better than the earlier requirement to have 44 years.
Missing years of NI then are not as critical as they once were. Sometimes then paying extra in voluntary NI contributions to plug any gaps is worth doing to trigger extra years and more pension. When it makes a difference these can be very good value pension investments. But if you have hit the full 35 years already or anticipate that you will in the remaining years to retirement, then there is no financial gain from plugging those past gaps.
If you are borderline for any State Retirement Pension at all then it can depend a lot on whether you have savings or other pensions that might rule you out of Pension Credit. If you can’t rely on PC to top you up, then it can be well worth seeing if you can get yourself just over the 10 years NI record needed to receive any State Retirement Pension at all. The investment to get £47 a week minimum pension rather than none at all can be the best “pension investment” of all. And further contributions to plug gaps could be very worthwhile too.
But in considering ways to increase your State Retirement Pension it is worth looking at where you might stand under Pension Credit, as if your other income or savings are low this might top up your low State Retirement Pension anyway. The options above - to aim to maximise State Retirement Pension - only make sense if you anticipate having other pensions (work or private) or have built up other savings and investments.
8. Will people be better or worse off under the new proposals?
It depends.
To begin with people will have “transitional protection” for much of any losses, so they won't lose out on what their contribution to date would have produced up until April 2016, but may lose out on further entitlements that might have accrued after then.
Many who were only going to get around £125 under the old system may well see the happy jump to that headline figure of nearer £165 a week, even after some deduction for votracted out time.
It is expected that in the early years some 75% will be better off thanks to the changes and 25 % worse off.
However, as time moves on, the proportion of new pensioners incomes that will be protected will get less and less. And the lack of any further build-up of additional state pension will be felt more and more.
So, by 2050 the balance of winners and losers may be more like 50-50 and by 2060 when the new style rules are the only ones for the pensioners of that time then the balance ends up as 25% winners and 75% losers. New young workers then will pay the full rate 12% NI but receive no additional state pension as a result.
The Government’s case for change is that today’s young people are paying more, but for a better basic pension and that they now have access to new low cost workplace pension. These and other provisions are seen as the way forward, rather than to allow the scary black hole to develop further if people were to continue to be building up entitlements to additional state pensions such has SERPS and S2P.
Closing off any increasing exposure of the system’s finance to growing entitlements to additional state pensions is seen as essential as the population ages. So the aim is to offer something in return for the additional years of NI contributions and a standard higher rate of 12 % from April 2016, in the form of a higher full basic State Retirement Pension. But to avoid the Treasury nightmare of funding any further growth in entitlement to additional state pensions.
The essential problem for an ageing population is that my NI contributions now do not go into a state pension fund that might invest in useful infrastructure schemes etc – but into paying today’s pensioners. And if I come of age then, my pension will be paid by the workers of tomorrow. A funded scheme could be the safest, cheapest and simplest way of providing additional pensions – given some of the problems and charges – in employer and private schemes - but getting there would be financially very difficult and politically controversial.
You can see more details from BBC news here . And from Which? magazine here.
Broadly, then:
- winners include: the self-employed (who can't get additional pension), the low paid, carers, some who were contracted out, early retirers or those able to build up some years of new style pension contributions
- "losers" - and "no changers" - include: those with under 10 years NI or over 35 years, higher earners who can no longer build up substantial additional state pensions, the employed young who can't build up any additional state pensions at all, spouses/civil partners/widow(er)s who can no longer benefit from their partner’s contribution as before
9. What parts of a new pension can I inherit from my spouse or civil partner?.
The old pension was designed in the 1940s world - traditional family roles re-asserted themselves after World War II, based on a male breadwinner and a female financially dependent homemaker spouse. So there are extensive arrangements under the old style scheme to allow the usually higher contributions record of your husband in the event of divorce or bereavement.
The new State Pension is based on your own contributions record, as :
- more women are earning,
- the pension is far less earnings related than it once was anyway
- and even if one partner has had a more stay at home role looking after children or caring for people with health problems, they will have built up National Insurance through a credits by credits.
There are then far less opportunities to approach the new State pension with a minimal contributions record and pension entitlement than there once were under the old xcheme., so in general there is far less potential to claim on the basis of your spouse or civil partner’s contributions.
But there are still some bits of the new State Pension that can be inherited if your marriage /civil partnership began before 6th April 2016
- you can inherit amounts that you would have been able to inherit in the old scheme - such as a proportion of their additional state pension - if your partner reached pension age before April 2016 or they died before 6th April 2016 but would otherwise have reached pension age after that date
- you can inherit half of your partners “protected payment” i.e the amount they would have got in recognition of past additional pensions - if they would have come come under the new State Pension scheme and they died on or after the 6th April 2016
And whenever your marriage civil partnership began:
- you can inherit some of any extra state pension for them deferring taking up their State Retirement pension
- in the event of divorce or dissolved civil partnership, the Courts can make a “pension sharing order” that again affects the additional State Pension from the old system or the “protected amount” under the new, in a similar way that they can with other works and personal pensions
10. Does the higher pension mean the end of Pension Credit as we know it?
At first sight, it can seem so, as the full new style State Retirement Pension is deliberately pitched at a higher rate than the standard rate for a single person under Pension Credit., which is the means tested top up that tries to ensure that no-one in pension age is left with an income below a certain legal minimum.
So for example a single pensioner with an income consisting only of the full basic “old style” Retirement Pension of £125.95 could be entitled to a potential top up of £37.05 a week to bring them up to the PC minimum income of £163.00 . But a pensioner on the full rate of new style State Retirement State Pension age would not need to claim PC.
The problem with the old way of applying for a separate means tested top up is that:
- Only some 60 to 70% of those entitled to claim that PC top actually do so, mainly because they don’t know about it.
- While for those that do, there is very little incentive to build up small private/work pensions or save for some additional pension if you would have got the first £37 anyway.
But rumours of the death of Pension Credit have been somewhat exaggerated. In the current scheme, there may still be an entitlement to PC top ups if:
- A partner has a low entitlement to any State Retirement Pension
- Or where extra amounts are due because of claiming a disability benefit such as PIP or Attendance Allowance) or a carers benefit such as Carer’s Allowance,. Both casn be highly relevant for older people affected by cancer.
So even if a couple had full “new style” State Retirement Pensions of £164.35 each – or similar levels of income from State and other pensions they could be entitled to Pension Credit at incomes up to £450 (ignoring any disability benefits) . See the next blog to see how this works.
In future it is planned to merge Housing Benefit (that helps with rent) and any child tax credit (if you have grandchildren lying about the place) into Pension Credit in order to allow the abolition of those two benefits. So that will mean that more pensioners – even the single, fully fit ones on full rate “new style” State Retirement Pension would need to claim a Pension Credit top up.
But that’s a whole other story which we will cover in the next blog
Links and further reading
Finding individual face to face help from a Benefits Advisor:
- Visit your local Maggie's Centre and talk with one of our benefits advisors. Find your local centre here
- See if there is a Macmillan advice service near you here
- Find your local Citizens Advice office: in England & Wales - here. In Scotland - here
Other blogs in this series
- Part 1: Introduction - when is pension age? welfare reform in pension age, steps to maximum entitlement - available here
- Part 2: State retirement Pension - the pre-april 2016 sytem - history and what makes up your entitlement - available here
- Part 4: Extra help after a cancer diagnosis - disability benefits and Pension Credit - available here
- Part 5: PC sums in more detail - available here
External links
- For more details of both old and new Retirement Pensions you might want to take a look at Age UK’s Factsheet 19 State Pension available here.
- You can see articles on winners and losers under the new scheme: from BBC news here . And from Which? magazine here.
- To check out your National Insurance record see details - see here
- If you are over 55, you can get an estimate of your likely retirement pension - see here.
- To check the age from when you can start getting your state pension - see here
For other blogs in this series of Benefits in Pension Age:
- Part 1 – Welfare reform in pension age and when exactly is pension age? - see here
- Part 2 – The "old style" State Retirement Pension – see here
- Part 4 - Pension Credit - see here
- Part 5 - Examples of Pension Credit sums – see here
Other useful blogs
- extra help from disability benefits because of extra costs of cancer - see here
- benefits for carers - of any age - see here