Two thirds to miss out on full state pension

Two thirds of people reaching retirement age next year will receive less than the full “flat-rate” state pension. Just 37 per cent will receive the greater weekly payment of £148. Most of those retiring under a scheme coming in next April will be told to make up the difference from their savings.

TWO in three people who reach retirement age next year will receive less than the full “flat-rate” pension from the state, ministers have confirmed.

Many people in their late 50s and early 60s had expected a larger payment of around £148 a week under major reforms to the state pension – up from the £116 “basic” payment to pensioners today.

The Government has repeatedly insisted that the vast majority reaching state pension age next year will earn at least the new flat-rate amount.

However, newly published official figures show that most pensioners will find their own savings have been included in the calculations.

In a written statement to the House of Lords, the pensions minister Ros Altmann disclosed that just 37 per cent of people would receive “the full amount of new state pension directly from the state” in the first year of the reforms. The remainder would come from a “private pension”, she said.

Within the past 48 hours, the Department for Work and Pensions has published a document online explaining the situation.

It says many people paid lower National Insurance contributions during their careers – a perk of the old pension system – and these payments will be taken into account under the new scheme. Civil servants are preparing to send letters to thousands of people approaching retirement to break news of the deductions and to offer an explanation.

Malcolm McLean, of pension consultancy Barnett Waddingham, said: “The fact sheet [published this week] illustrates the mind-blowing complexity of the arrangements being put in place.

“It also gives the lie to the claims made originally by ministers that the new system would produce a more generous simpler flat-rate state pension for millions of new pensioners going forward.

“None of these claims would appear to be true, at least in the short term.”

Most people who reach state pension age within the next two decades have paid lower National Insurance “at some point”, the DWP document says.

Since the Seventies, it has been possible to opt for lower payments by “contracting out” of the additional state pension. This is an earnings-related top-up to the basic £116 a week.

As a condition of opting out of the top-ups, workers were required to accrue a private pension. Sometimes their National Insurance rebates were paid directly into their private funds. In other cases, people were expected to invest the spare money themselves.

The document explains that the Government will make a complex calculation to work out how much someone has managed to build up in private savings from their National Insurance rebates.

A deduction from the £148 flat-rate will then be made, reducing the state’s direct payout. Those who would have qualified for a larger payment under the old state pension system will keep their entitlements.

In her statement, Baroness Altmann said that the number of people who receive the full flat-rate amount from the state will rise to half in 2020 and then 84 per cent by 2035. “Nearly 90 per cent of people reaching state pension age in 2016-17 would have the full rate of the new state pension, or more, if we include the amount of additional state pension they opted out of or were opted out of when contracted out,” she added.

The coalition government announced it would simplify the state pension in one of its first acts in 2010. Ministers said they wanted to end the indignity of means-testing and help women, the self-employed and lowpaid.

Under the new scheme, the earnings-related top-ups will eventually be phased out and every pensioners will receive the same.

‘It gives the lie to claims by ministers that the system would produce a more generous flat-rate pension’