"State pension overhaul to leave most people worse off"

[dutchman]

Most people will end up with less money in retirement under new state pension proposals, a leading think tank has warned.



The Institute for Fiscal Studies (IFS) said that the Government's proposals for a flat rate £144 a week state pension "imply a cut in pension entitlements for most people in the long run".

Even part-time workers and women who take time off to care for children, who many assumed would be beneficiaries of the changes, will end up with a lower amount of money under the new system than under the old one.

"The main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups – most notably the self-employed," said Rowena Crawford, at the IFS.

Under the new rules, A flat rate weekly pension will be introduced worth £144 (£7,488 a year) in today's money, although after inflation it will probably be worth around £155 by the time it starts in April 2017. This compares with the current state pension, which is £107.45 a week.

However, second pension and other top-up arrangements will be removed under the reforms. These other arrangements include the state second pension, the state earnings-related pension and graduated pension. This means that many people who contributed to these top-up arrangements will end up worse off.

People will have to make 35 years of National Insurance Contributions to get the full flat-rate pension. The minimum pension will be £41 a week, but you will have to work for ten years to accrue even that. Currently you can build up state pension from just a year.

Taking a career break to a raise family will be counted towards the 35 years of NI contributions needed for a full state pension, following the changes. Ms Crawford at the IFS, said the proposals were "a welcome simplification"

"There will be a fairly complex pattern of winners and losers from the reform in the short-term – the main effect in the long run will be to reduce pensions for the vast majority of people," she said.

She added that workers should be wary of ministers' claims that this will be the final radical reform of state pensions.

Similar claims were also made for the reforms announced in 1998, 2002 and 2006. "Such frequency of reform makes it harder for individuals to plan for retirement appropriately," she said.

[dutchman]

The new "Flat Rate Pension"

Who will get it:
Those who retire after 2017 and have paid at least 35 years worth of full National Insurance Contributions.
As above and have also paid higher-rate National Insurance Contributions.

Who won't:
Those who already receive a state pension or pension credit.
Those who will retire before the new scheme begins in 2017.
Those who have not paid at least 35 years worth of full National Insurance Contributions.
Those who have "contracted-out" of full National Insurance Contributions in order to join a private pension scheme.

[rebbonk]

Leaves me facing being worse off. I was told I only needed 30 years contributions. It's too late now!

[dutchman]

Leaves me facing being worse off. I was told I only needed 30 years contributions. It's too late now!

Not necessarily Rebbonk. You are allowed to "buy" contributions for the missing years as long as you act within six years of the missing payments. You may need to consult a pensions expert.

Also I was mistaken in believing that those who had paid higher-rate NIC would only be entitled to the new flat-rate. Apparently if they have already qualified for a higher pension they will still receive it.

It seems to me the new "simpler, flat-rate" is anything but simpler or a flat-rate!

[dutchman]

Many married couples will be almost £1,500 a year worse off under reforms to the state pension announced yesterday, experts fear.

Widows and divorced women could also lose if the Government abolishes a rule that allows women to link their pension to their husband's if their own entitlement is smaller.

The abolition of pensions "inheritance" will take place if yesterday's White Paper on state pensions follows recommendations published in a Green Paper published in April 2011.

Currently, women with a poor record of National Insurance contributions (NICs) are entitled to a minimum basic state pension of 60pc of their husband's entitlement. This looks likely to be abolished when the flat-rate state pension is introduced.

For example, a couple in which the man has a full basic state pension and his wife has no record of making NICs currently gets about £172 a week in state pension. This consists of the man's pension of £107.45 a week, plus his wife's entitlement to 60pc of that figure.

But if this entitlement is scrapped when the flat-rate pension of £144 a week is introduced, the man will receive that figure and his wife will get nothing, so their combined income falls is £144. This is £28 a week or £1,456 a year less than they would get under the current system – a fall of 16pc.

People who have already retired when the changes come in, probably in 2017, won't be affected. Under the new rules, people with less than 10 years' NICs will not be entitled to any state pension. Thirty-five years' contributions will be needed for a full pension, up from 30 years currently; entitlements will fall in proportion for incomplete records.

Widows and divorcees could also lose as a result of the changes. Currently, widows can inherit their husband's basic state pension, plus half of his entitlement to top-ups such as the state second pension and Serps, if her own NICs would give her less.

Divorcees can use their former husband's NI record, for the period of the marriage, if it is better than their own.

The potential effects of the changes were highlighted by Malcolm McLean, a consultant at Barnett Waddingham, the actuary. He said: "If implemented, this would mean many women without a full NI record in their own right could be considerably worse off than now. Is this a case of simplification meaning loss? It looks like a retrograde step for women."

The 2011 Green Paper, entitled "A state pension for the 21st century", said: "People would qualify for the single-tier pension individually, irrespective of whether they were married, divorced or widowed, reflecting the fact that most people working today can expect to build up sufficient state pension in their own right.

"Rules around state pension entitlement would be simplified so that there would be no special rules for bereavement, marriage or divorce."