New State Pension: who wins and who loses?
From today, the biggest overhaul to the State Pension in a century takes effect with the introduction of a new single-tier pension of £155.65 per week.
The new pension is based on your date of birth so that all men born after 6 April 1951 and all women born after 6 April 1953 who reach retirement from today onwards fall under the revised rules.
Anyone who reached State Pension age before today will come under the old system where they’ll receive £119.30 per week, a difference of £36.35 per week just for being born a day earlier.
The years of National Insurance contributions or credits needed to qualify for the full basic state pension will rise from 30 to 35 years under the new system, with anyone showing less than 10 years on their NI record not getting any pension at all.
So who are the winners and who are the losers of the new system?
The self-employed are the big winners of the new State Pension. They were excluded from the additional earnings-related pension under the old system pension so their maximum possible State Pension was £119.30.
Steven Cameron, pensions director at Aegon UK said: “With many people spending more than 20 years in retirement, some self-employed could gain almost £40,000 more from being eligible for the new State Pension.”
Maike Currie, investment director for personal investing at Fidelity International, said self-employed workers could see their pension rise from around £6,000 a year to £8,000 a year.
“While this might not sound much, to secure the equivalent income of £2,000 a year, rising with inflation would cost you around £65,000 if you’re buying a guaranteed annuity at age 65,” she said.
However, Cameron warned that while this is a positive step for the self-employed, even the higher level is unlikely to provide them with a comfortable lifestyle in retirement especially as they don’t benefit from automatic enrolment into a workplace pension. He said this makes it “even more important” for them to make adequate private pension provision.
Women will be the ones to lose out, according to Currie. “The changes to the State Pension landscape have been dubbed by the government as a huge boost for women by addressing gender inequality in the current system and bringing forward by over a decade the point when men and women will achieve equal payments.”
But she said that this has been “undone by separate changes” to the women’s State Pension age, which is rising from nearly 63 now to 65 by 2018.
This means only 80,000 women will receive the new flat-rate State Pension from 2016 to 2018, compared with 390,000 men, according to figures by the Department for Work and Pensions.
Younger workers will also lose out. According to the Pensions Policy Institute, three-quarters of people in their 20s would lose an average of £19,000 over the course of their retirement, as a result of moving to the new system.
The difference is due to the additional savings built up by older workers under the older system called the State Second Pension. Younger workers will not qualify for this despite paying NI contributions.
I lose under the new system, what can you do?
For those in retirement, Currie said that if you can afford to, there is a chance to plug gaps in your NI record, and so give your State Pension a boost.
Men over the age of 65 and women over the age of 63, can top up their State Pension to a maximum of £1,300 a year or £25 extra a week, in return for a one-off payment. The offer is open to anyone who reaches State Pension age today and will remain open for qualifying people until April 2017.
“This is a valuable option. A man aged 65 today would need a fund of around £25,000 to provide a level annual annuity of £1,300 a year – and a fund of around £43,000 to provide £1,300 a year increasing in line with inflation up to a max of 5%,” Currie said.
“For a woman aged 63 today, this would need a fund of around £26,000 to provide a level annuity of £1,300 a year and £46,000 to provide £1,300 a year increasing in line with inflation up to 5%.”
For young people, they have time on their side so Currie said an individual savings account (ISA) is a good way to shelter some savings away from the taxman.
“Also take advantage of your workplace pension offering from your employer with matching contributions or consider setting up your own pension pot or Lifetime ISA when it is introduced. Even if you can only afford to put a tiny amount away each month – do this regularly and it could make all the difference to ensuring a dignified retirement”, she added.