Starting from today, if you are a female born on or after 6th April 1953 or a male born on or 6th April 1951 then you will qualify for the new state pension. The old state pension is being replaced by a new ‘flat rate’ state pension of £155.65 a week.
The new state pension sounds much better than the previous state pension that paid out £119.30 a week. It was also criticised for being too complicated and created gender inequalities. However, many workers will now see a rise in their national insurance contributions by £37 a month to cover this. In addition to the Institute for fiscal studies has predicted that those retiring in the next few years are in for a nasty surprise, as 61% will receive less than the flat rate.
If you ‘contracted out’ of receiving the receiving state second pension benefits or State Earnings Related Pension Scheme (Serps) in exchange for paying a reduced rate of NI, then unfortunately you will be missing out in this new state pension. That means that 8 in 10 people reaching state age in the next 4 years will be effected.
The reason for this is that you will only be paid the top rate if you have made National Insurance contributions for 35 years. Those who contracted out had made lower contributions at some point and will therefore not qualify for the top rate.
If you are unsure whether this will affect you then please call our payroll team on 0121 559 1071.
If you have already built up an entitlement of more than the full rate under the old pension arrangements, then it will be protected. If not, then unfortunately you will lose out under the new state pension too.
This is said to impact people currently in their 20s and 30s who could have built up entitlements, but can no longer do so thus making them worse off in retirement. According to the Pensions Policy Institute this is around 11 million people. They also found that those in their 20s will lose out on as much as £19,000, with those in their 30s losing out on £17,000 of state pension.
Furthermore, those who have made NI contributions for less than 10 years who would have previously received a small pension, will now receive nothing.
However, it’s not all doom and gloom as the new state pension will benefit some people.
Over 3 million women are said to receive £11 a week more by 2030 in the new state pension. In addition to this those that have been self-employed for at least 10 years will gain an average of £7.50 a week. This is due to being excluded from the additional earnings related pension, where they were previously restricted to £119.30 a week.
Verdict
We can clearly see that the new ‘flat rate’ state pension is not actually a flat rate; nor is it less complicated. The new state pension gives further evidence that you should be putting additional money aside to ensure that you aren’t reliant on the state pension. Particularly if you are between the ages of 20 and 40. We can help you with any pension planning that you require, whether it is for yourself or auto enrolling your staff call us on 0121 559 1071.
