Pension Clinic clarifies the complex rules relating to a confusing state pension transition that may affect what you get.
April 2016 saw the biggest shake-up in the state pension system in a generation, with the old system of a basic state pension plus an earnings-related top-up being replaced by a new “single state pension”.
However, the move from the old system to the new one has been accompanied by quite complex transitional rules, and this has led to some confusion about how much you can expect to get. That’s why I will address a commonly asked question: “Will I get the new flat rate, and if not, why not?”
Under the new state pension system, if you have “35 qualifying years” – of paying national insurance contributions or receiving pension “credits” – you get the full flat rate, currently £164.35 a week. This is the case for anyone who spends their entire working life under the new system.
However, for most people, who will have years of contributions built up before April 2016, there are two main situations in which they might not get what they expect, even if they have been paying in for 35 years.
The first situation is where they are expecting to get more than £164.35 a week. Many of those who had long working lives under the old rules may have built up a large pension through a combination of their basic state pension and their entitlement under the state earnings-related pension scheme (Serps).
When the new system was brought in, the government decided that it would be unfair to take accumulated rights away, so whatever was built up by April 2016 will be honoured under the new system. This means someone already with state pension rights of, for example, £180 a week by April 2016 will get this figure rather than the flat rate of £164.35. However, any contributions made after April 2016 will not add to their pension.
A second situation where people may not get what they expect is where they were members of certain “contracted out” occupational or personal pension schemes.
Until 2016, occupational pension schemes could do a deal with the government: in return for a lower rate of national insurance contributions by workers and firms, the company scheme promised to replace part of the state pension that would otherwise be built up. Under the old rules, this meant that contracted-out workers built up a basic state pension, but their earnings-related retirement income would come from their company scheme rather than the Serps scheme.
When the new system came in, the government had to decide what to do in cases where workers might have been paying in at a lower (“contracted out”) rate for many decades. They decided that in 2016 there would be a one-off deduction from state pension entitlements to reflect past contracting out.
However, after 2016 contributions would be built on top of this initial amount. Those with several years to work post-2016 could thereby build up a full flat-rate pension despite being contracted out in the past, but those who retired soon after 2016 would not get the full pension.
The new system will be a lot simpler, especially for younger workers, most of whom will simply get the new flat rate. But in the meantime, the situation won’t be as straightforward.
If you have more questions about the new system, I have prepared a guide, The New State Pension – Your Questions Answered, which can be downloaded from the Royal London website. If you want a personalised account of what you are likely to get, visit the government’s “check your state pension” website.
Steve Webb is director of policy at Royal London.
Who might get more and who might get less than the state pension system’s full flat rate?
Case 1 – Mary gets more than the flat rate.
Mary has had a long working life and built up a substantial Serps pension. As at April 2016, the situation is that she has a basic state pension under the old rules of £125.95 (in today’s money) plus a Serps pension of £50 a week, a total of £175.95. That compares with £164.35 for the full flat-rate pension. As the first figure is higher than the second, Mary’s pension will be based on the £175.95 ‑ figure, but additional years of contributions after April 2016 will not increase it.
Case 2 – Larry gets less than the flat rate.
For most of his working life, Larry was a member of a “contracted out” company pension scheme, although he built up a few years in a Serps scheme. As at April 2016, he has a basic state pension of £125.95 plus Serps of £5 a week, which brings the total to £130.95 a week. The rest of his retirement income will come from his company pension. Under the at-rate pension scheme, he would get £164.35 minus a big deduction – say £60 – for past contracting out: a total of £104.35. As the first figure is higher than the second, Larry’s pension will be based on the £130.95 figure. But as this is below the full at rate, any subsequent contributions will result in a bigger final state pension figure.