Will YOU be left flat broke by the flat rate pension fiasco?
As new figures show a third are still getting less than they expected...
THE State pension was overhauled three years ago in an attempt to make it simpler and fairer.
But an incurable hangover from the old regime continues to haunt and confuse people who are heading towards retirement.
As part of the changes in April 2016 – billed as the biggest pensions shake-up in more than 100 years – a ‘flat rate’ was introduced.
This is the maximum sum available to people with sufficient years of National Insurance contributions made from careers spanning decades.
That rate currently stands at £168.60 a week.
The new system applies to those who reached State pension age on or after April 6, 2016. So far, this represents 1.1 million people out of 13 million claiming a State pension.
But the bite of reality – and the devil in the detail – is that those falling under the new regime are not always eligible for the new rate.
This is the case even when they believe they have enough years of work and contributions under their belt to qualify.
Figures obtained exclusively for The Mail on Sunday show that only a third of new State pension claimants – 358,679 people – are receiving between £150 and £ 168.60 a week.
It is not known exactly how many are receiving the exact flat rate.
Results of a freedom of information request by pension provider Canada Life also reveal that more than 405,000 people are receiving less than £150 a week. This equates to 37 per cent of pensioners claiming under the new system.
WHAT HAS CHANGED?
BEFORE April 2016 the State pension was made up of two parts, the basic and additional State pension. To be eligible for the highest sum from the basic element, people needed 30 years’ National Insurance contributions, though top- up payments were made to some married couples. This regime was then overthrown. A flat rate basic pension was introduced, based on the National Insurance records of individuals alone rather than impacted by spouses. But individuals now need 35 years – not 30 – of contributions to get this full flat rate at retirement age.
WHY AREN’T ALL ON THE NEW RATE?
MANY people who have reached pensionable age since April 2016 have a long history of saving under the old regime.
Some would have been entitled to more than the new rate under old rules – some less. It was not considered fair to wipe out this history.
The reason so many now seem to be losing out is because of a deal struck years ago with their workplace pension schemes, known as ‘ contracting out’. Workers and employers paid less National Insurance, but a sum was i nstead spooned into a personal or works pension.
The intention was a lower State pension payment, but a better employee pension pot. Steve Webb, director of policy for mutual insurer Royal London and a former
pensions Minister, says: ‘In retirement there is a deduction from the State pension to reflect this deal.
‘It leaves many people short of the full State pension, but in most cases this is made good by extra i ncome from t heir workplace scheme at retirement.’
SO EVERYTHING IS FAIR NOW?
NOT quite. Many people will not have understood – or may never have been told – that payments were being redirected into a workplace or personal pension, impacting on their right to build entitlement to a full State pension.
Ros Altmann, a leading pensions expert and author of the blog pensionsandsavings.com, says: ‘The confusion over the new State pension is a classic example of the dangers of complicated pension changes. It prevented people from understanding the changes and misled them into believing they had more State pension to live on than turns out to be the case.
‘Government has never been good at explaining changes it makes and pensions are one of the worst examples of this failure.’
SNAGS WILL TAKE YEARS TO RESOLVE
CONTRACTING out was abolished in 2016, so problems with the new State pension will eventually disappear. Webb says: ‘Over the coming years more people will gradually get a full State pension as the i mpact of contracting out reduces.’
But it will take ten years or more to unravel.
Altmann says: ‘ Many people believe they will get a full flat rate pension when in fact some of that payment will come from a private pension, not from the State.
‘Most people did not understand this and even pension schemes have made mistakes.’ The Department for Work and Pensions says the average weekly sum being paid to people eligible for the new State pension is £154.70.
This represents an annual income that is £722 less than the flat rate.
Alex Leahy, of the Governmentbacked Money and Pensions Service, says: ‘It’s really important that people understand how much State pension they are entitled to.’
Lower State pension payments may arise because of insufficient National Insurance contributions. People who were out of work for a significant length of time could be in this situation. They include mothers who raised children, carers looking after a disabled relative, or people who suffered from long-term illness.
People in these categories can receive National Insurance credits to improve their record.
But they are not always given automatically and not everyone claims them.
For every year of missed National Insurance contributions payments, the State pension is reduced by 1/35th – representing one of the 35 years that make up a full record. But you can ‘buy’ voluntary contributions to plug gaps.
Meanwhile those who built up a better State pension entitlement under the old system could get more than the new full rate. This is known as a ‘protected payment’.
According to Canada Life’s research, 314,836 people are receiving more than £168.60 a week for this reason.
Canada Life’s Andrew Tully says: ‘The State pension can be a minefield but ask for a forecast of what you are likely to receive.
‘ Remember, it is only there to provide a basic standard of living when you retire.
‘ Take control and seek professional advice if you want to maximise your finances in retirement.’