9 December 2015

New State Pension - Winners and Losers

The "flat rate" State Pension arrives soon for those reaching State Pension age from April 2016. One of the main objectives has been to simplify the current excessively complicated system.  But as usually happens the transition to the new system adds complication instead - and the transition includes most people who are about to retire! As a result there will be plenty of people who will be worse off.

The headline is certainly simple - the new flat rate State Pension gives you £155 per week from your State Pension age if you have at least 35 years of National Insurance contributions.

The complication starts to appear when you consider the additional state pension (SERPS and then State Second Pension - S2P). This was (and still is until April 2016) a significant top-up to the basic State Pension based on earnings and contribution time, and the key thing was that the top-up is index-linked. That top-up is being abandoned.

And if you work for longer than 35 years you will not, in future, increase your State Pension, whereas with the additional State Pension you would have continued to improve your future prospects.

And if you "contracted out" - like most employees - and paid into a separate private or company pension (instead of accruing additional State Pension), the "flat rate" State Pension will most likely have a dip in it for you since there will be a deduction for the time you were contracted out.

If you have less than ten years of NI contributions, under the old system you would receive a small State Pension. But under the new, you will receive nothing.

But you are likely to be a winner if you are a low earner or have been long-term self-employed (without contracting out). Both of those categories could accrue the full new State Pension.

All in all it is impossibly complicated and this short blog cannot do justice to the changes.

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