State pensions are being shaken up in the hope of making them simpler and fairer. The government has decided to introduce a new weekly flat rate payment worth £144. Couples who are currently penalised, mothers who take career breaks and the self-employed will benefit from the overhaul. But can everyone be a winner?
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When the state pension was first introduced in 1909, the maximum payment was the equivalent to around £20 in today’s money. Half a million people aged over 70 with an income of less than 12 shillings a week and not much furniture (which was used to measure wealth) were eligible to receive it.
Now, the state pension system will see a single-tier pension which will be paid to every qualifying new pensioner from April 2017 at the earliest.
What’s the current system?
The basic State Pension is a regular payment from the government that you can get when you reach State Pension age and to get it you must have paid (or been credited with) National Insurance contributions.
The most you can currently get is £107.45 per week. In addition if you’re married or in a civil partnership and expect your basic State Pension to be below £64.40 per week you can top it up to that amount (but there are qualifying rules).
Under the current system, anyone aged over 80 who does not qualify for a basic state pension because of incomplete National Insurance records may be able to get a smaller pension as long as they meet residency requirements.
Finally you have the means test which looks at your wealth and determines if you are poor enough to qualify for a higher or lower state pension. The extra amount given to those less wealthy is called the Pension Credit or Minimum Income Guarantee. It’s a weekly minimum payment of £142.70 for a single person and £217.90 for couples.
How will this change?
New pensions will only be paid to pensioners reaching state pension age from 6 April 2017. This weekly payment will be £144 – but it may be affected by inflation rises between now and 2017.
In summary you will now have to work longer – making 35 years worth of National Insurance contributions (NIC) when compared to the current 30. If you haven’t got 35 years of National Insurance contributions you’ll get the relevant portion. For example, twenty-five years of NIC will get you 25/35ths.
Anyone who has not paid National Insurance for at least 10 years will not qualify for the enhanced state pension at all and millions of current pensioners, and those who qualify before the cut-off date, will continue to receive their entitlement under the current system.
If you pay into a State Second Pension you are also likely to be affected. As the new State Pension rules are implemented, the current State Second Pension will be scrapped and whilst no-one will lose any of the top-ups they’ve already accrued or contributed up to 2017, once the date arrives, nothing more will be added.
Those in the private sector with contracted out final salary schemes will also feel the impact. Contracting out for these schemes will be abolished in 2017 – so there will be an extra 1.4 per cent of salary to pay in NIC. On the positive, the pension will be higher as well.
Of course it’s not all bad news as there are also some winners.
If you’re self-employed, for example, or if you have taken time out to care for children or relatives, you stand to benefit. The latter will get credits against NIC so you won’t lose out and former will gain from the ending of the State Second Pension (as under the current system you have no rights to it).