There’s a new ‘flat rate’ state pension that came in on April 6th – paid to anyone who reaches state pension age from now. Some women will get more than under the current system, but others will lose out.
1. The flat rate pension isn’t a flat rate at all
The maximum that people will be able to get from the new state pension will be £155.65 a week, once the system has settled in. However, the Work and Pensions Select Committee found that only 13% of people will get the full rate of £155.65 in the first year.
2. You’ll need 35 years of National Insurance to get the full state pension
Under the existing state pension system you need 30 years of National Insurance to get the full basic state pension. With the new state pension, you’ll need 35 years.
3. If you don’t have ten years of National Insurance, you’ll get no state pension
This change is more likely to affect women than men. Under the basic state pension system, if you’ve paid or been credited with National Insurance you’ll get something (even if you’ve only paid a few years of NI). Under the new state pension system, if you haven’t paid or been credited with ten years of National Insurance, you’ll get nothing.
4. If you’ve built up more state pension under the old system, you’ll keep it
On April 6th, everyone will get a ‘starting amount’ of their state pension. That is the amount you’ve built up under the old basic state pension plus additional state pension system, and what you would have build up under the new system, had it been running. You get to keep the higher of the two amounts, but any state pension you build up in the future will be under the new rules.
5. You won’t get the full rate if you’ve been contracted out
If you’ve been contracted out of National Insurance, which means you’ve paid a lower rate of National Insurance, you won’t get the full £155.65 rate. Instead, for every year that you’ve been contracted out, your state pension will be reduced. You can read more about how contracting out will affect your state pension in my article called Contracting out and the new state pension – how do you work out what you’ll get?
SAVVY TIP: If your employer operated a final salary pension scheme, then the whole pension would have been contracted out, which means you would have been without necessarily knowing this. If you have or had a personal pension, you would have made the decision to contract out and the National Insurance you would otherwise have paid would have been paid into your pension.
6. There will be winners and losers under the new system
The main winners will be those who are self employed. Under the basic state pension system self-employed people could only build up National Insurance towards their basic state pension (not SERPS or the state second pension). The main losers will be younger people who are likely to be employed throughout their lives and who will no longer build up a state second pension.
SAVVY TIP: Self-employed people may not continue to be the winners in the future because the chancellor announced in his March Budget that they wouldn’t pay class 2 National Insurance from 2018. It’s not yet clear how that would affect their entitlement to benefits or the state pension.
7. Some women will be better off, but some will lose out
When this pension was launched, one of the government lines was that women would be better off. And lots of media headlines said this was because women didn’t build up a state pension when they took time off work to look after their children. That’s not true. What is true is that the new system is better than Home Responsibilities Protection (HRP), which affected women who had children in the 80s and 90s.
However, some women will be better off because they will be able to build up credits to a higher amount (£155.65 a week rather than the basic state pension of £119.30 a week). Under the basic state pension system, they would not have earned enough to build up much, if any, of a SERPS or state second pension.
SAVVY TIP: Under the basic state pension system, since 2002 women have been able to build up a state second pension as well as the basic state pension (you can read more in my article called Your state pension when you’re bringing up your children).
8. Women won’t be able to get a state pension from their husband
Under the new system, you won’t be able to claim a state pension based on the National Insurance contribution record of your husband. The only exception is if you’ve paid the reduced rate of National Insurance (otherwise called the ‘Married Women’s Stamp’ at any point in the last 35 years.
SAVVY TIP: With the old state pension system, women could claim a state pension worth 60% of the full basic rate based on their husband’s National Insurance record, if it was better than their own.
9. Women won’t be able to get a state pension from their late or ex husband
Under the new state pension system, women will not be able to claim a state pension based on their ex husband or inherit a state pension from their late husband. As before, there is an exception if you’ve paid the Married Women’s Stamp in the last 35 years. Whether or not you can inherit a state pension from your late husband depends on when he died and whether or not he’d reached state pension age. You can find more information about this in my article called The flat rate state pension – will you still be able to claim on your husband’s NI record?
10. National Insurance contributions will rise for people who’ve been contracted out
Contracting out is ending from April 6th and that means that if you’re currently in a pension scheme that’s contracted out (which will typically be a public sector final salary pension scheme), your National Insurance payments will rise from today. They will increase from 10.6% to 12% on a band of your earnings between approximately £8,000 and £43,000 in the current tax year.