The new state pension rules launched last week, and it is already clear that the new scheme will create winners and losers. Like most state schemes at first glance everything looks better, but on further examination it is clear that you could easily be worse off come retirement day. This blog takes a closer look at the factors that make up your state pension and what you need to get the full £155 a week.
The Facts about the new UK State Pension
- The new state pension will pay £155 per week providing a certain criterion has been met.
- Official figures show though that 1 in 5 people who retire this year will be better off under the new system than the old.
- According to the government people in their 40s, 50s, and 60s should receive more under the new scheme than they did under the previous scheme.
- State Second Pension (S2P) is now discontinued. According to research conducted by the Pension Policy Institute around 11 million people will be worse off due to the abolition of SP2. People under 40 and widows will also be adversely affected.
- To get the full £155 per week, you will need to have paid 35 years worth of National Insurance (NI) contributions.
- If you paid less than ten years NI contributions you will receive nothing.
- Once you have paid in 35 years NI further payments are redundant from a pensions point of view.
How the New State Pension Works
The idea is that for every year you have paid NI you will receive £4.44 per week in pension payments until you reach £155. Where it becomes complicated is that if you had contracted out, also known as graduated pension, Serps, or SP2. If you contacted out you paid a lower rate of NI, and this will affect your state pension in a negative way. This is calculated on different rates depending on when you contracted out. The relevant dates are 1997 to 2002, and 2002 onwards.
The reason for the reduced state pension is that the Department of Work and Pensions assumes that you will receive pension payments from your other pension schemes.
Although a new study from Aegon has shown that annuity rates are at an all time low, due to the confusion over how much you will actually receive from the new state pension, it is advised that you use an alternative pension provider to at least plug any gaps in your retirement income.
Steve Cameron of Aegon said:
“With the Government’s new state pension going live, Aegon has shown its value by calculating how much it would cost a man or woman reaching state pension age (currently 65 for men and 63 for women) that day to buy an equivalent amount through a competitive annuity provider.
“As a result of historically low interest rates and improved life expectancy, annuity rates are currently at an all-time low. This means if someone wished to buy an equal amount from a private pension fund, a male at age 65 would need a fund of £243,000 and a female who currently has a state pension age of 63 would need £264,500.
“The introduction of the new single state pension should be a prompt for people to review their retirement aspirations against what they will receive from the state and then act to begin plugging any gap.”
This becomes especially poignant for couples. Under the new scheme it will not be possible for a surviving spouse to claim their partners NI contributions.
Women Worse Off
The new state pension has been marred in controversy especially from women’s rights groups. Under the old state pension a widowed partner could claim their partners National Insurance contributions giving them the full state pension. Under the new scheme, this will no longer happen. One woman, Jane Harding, 61, commented:
‘First, I had my pension delayed by six years due to the age equalisation, now they’re making this large deduction. It’s devastating.’
In many respects escaping the uncertainty of the state pension is preferable than riding the rollercoaster to see how much you will be left with when you retire, especially if you have a few years to go.
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