Figure out top of pots
FIVE-MINUTE GUIDE TO... THE OLD AND NEW STATE PENSION
THE STATE pension is hugely complicated at the best of times, but perhaps the most confusing thing of all is that there are actually two of them. Those who retired before April 6, 2016, qualify for the old basic state pension, while those retiring afterwards get the new single-tier state pension.
At first glance, this double pension system is unfair, because the old state pension appears to pay less than the new one.
From April 6, anyone getting the full new state pension will receive a maximum of £185.15 a week, but this falls to just £141.85 under the old system.that is a difference of £43.30 per week, which works out at £2,251.60 less over a year.
Many who retired on to the old basic state pension feel aggrieved as a result, but is this justified?
It is not that simple, as there are winners and losers in both systems, according to Canada Life technical director Andrew Tully: “Some get less than the headline rates on both pensions, while others get more.”
Under both state pensions, retirees get an extra earnings-related amount through the additional state pension, also known as Serps or S2P.
Tully said some workers on the old, apparently lower, state pension contracted out of the additional state pension and paid lower National Insurance (NI) contributions as a result.
“They get less additional state pension but should hopefully get a higher private pension to compensate,” he added.
The average amount that retirees get in practice is similar for both pensions. Currently, men get £170.50 a week under the new state pension, and £172.64 under the old one.
The new state pension has closed the gender pension gap, as it pays women £164.74 a week on average, up from £145.87 for women who retired under the old regime.
The old pension was earnings-related, whereas the new one is based on how many years of qualifying NI contributions people make, topped up by NI credits if women took time off to raise children.
Another difference is that you need 35 years of qualifying NI contributions to get the maximum new state pension, but can qualify for the maximum old one with just 30 years.
Nobody will be surprised to discover the new single-tier was introduced to save money, by cutting overall state spending on pensioner benefits. Ending contracting out also cut the NI bill.
While the two systems are fairer than they first appear, some individuals can get badly caught out, and receive much less pension as a result.
The new state pension is designed to make things simpler and by giving a clearer idea of what people can expect when they stop working, encourage them to save more themselves, said Stephen Lowe, group communications director at retirement specialist Just Group.
He said it always pays to get a state pension forecast from gov.uk and plug any gaps in your NI record, and build retirement savings in your own name: “You could carry on working, if that is an option.”
He added: “Do some research, take advice or seek professional help to understand the options and make good choices.the government-backed, free, independent and impartial service from Pensionwise is a great place to start.”