New state pension: who are the winners and losers?
The new flat-rate weekly payment, set to start in April 2017, will be £144 but the final figure will actually be higher as it will rise in line with inflation over the next four years.
While a simplification of the state pension has been broadly welcomed, some will be hit by the new legislation.
Here, Tom McPhail, head of pensions research at Hargreaves Lansdown, outlines the winners and losers.
Taxpayers – winners
The changes to state pensions are cost neutral in the short term and save money in the longer term as state pension age pushes back to rise with longevity.
A simpler system will be far easier for people to understand.
The one-off assessment of some 26 million people’s entitlements will be a monumental and expensive task. However once complete, taxpayers should make savings from a simpler system which requires less administration.
The self-employed – winners
Currently the self-employed can only receive a maximum state pension of £107.45 per week. This will increase from 2017 to £144 per week for those who have 35 or more qualifying years.
Those who have combined basic and second tier pensions of less than £144 – winners
They will benefit from an increase to £144 per week.
Younger people who have already accrued some contracted out service – winners
Those who have contracted out yet still have sufficient time to build up further basic state pension will potentially benefit from the new £144 per week pension plus their contracted out monies.
Those with less than 10 years’ service at retirement – losers
Currently state pension is accrued on a year by year basis. However, 10 years will now be the minimum qualifying period of service.
Recent immigrants – losers
Anyone recently arrived in this country who isn’t able to build up 10 years’ worth of NI contributions before state retirement age will not get a state pension.
High earners – losers
Under the present system a high earner might have accrued a state pension in excess of £144 a week; in theory up to a maximum of £250 per week.
This will now be reduced to £144 per week (although benefits accrued to 2017 are retained).
State pension age rises – losers
Individuals will lose out by receiving their state pension later and will have to defer retirement or live on other resources. This will be particularly relevant to people in their 20s and 30s.
Final salary scheme members – winners and losers
Following the abolition of contracting out, both employee and employer National Insurance contributions will rise. In the private sector this may precipitate a further wave of scheme closures.
In the public sector, members may well be angered by their increased NI bill, however given that they will then be building up a more generous state pension and still getting their defined benefit public sector pension, they are actually going to do quite well from these reforms.
At present, employees and employers who are members of contracted out final salary pension scheme pay reduced rates of national insurance. When contracted out is abolished, their national insurance contributions will rise (see National Insurance Contribution rates below).
This could cost someone in a final salary pension scheme earning £25,000 a year an extra £270 a year national insurance.
Employee earns £25,000 a year
Increase in employee NIC is £270.65 per annum
Increase in employer NIC is £657.29 per annum
Employee earns £40,040
Increase in employee NIC is £481.24 per annum
Increase in employer NIC is £1,168.65 per annum
This reflects a 1.4% employee and 3.4% employer increase in NIC on earnings between £5,668 and £40,040
|Contracting out explained
There are two main state pensions: the basic state pension and the second tier, an earnings related state pension. Qualification for basic state pension benefits are based on the number of qualifying year’s service and for the second tier, are also based on earnings.
From 1987, pension savers have been able to contract out of the second tier, earnings related element Formerly SERPS (State Earnings Related Pension Scheme) now cS2P (Second State Pension). The ability to contract out did not start until 1988, however, as an incentive, people were allowed to back date the contracting out decision to the previous year.
Those who contracted out via a personal pension received rebates of part of their national insurance contributions paid directly into a pension plan. Those contracted out via a final salary pension scheme, benefit from reduced employee and employer national insurance contribution rates, since the scheme guarantees to pay an equivalent to the second tier pension.
Investors were either contracted in or out for the whole tax year and their contracted out status remained until they elected to change.