Single-tier pension Q&A: what the state pension changes mean to you

http://www.guardian.co.uk/money/2013/jan/14/single-tier-pension-what-state-pension-changes-mean

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The government has confirmed its plan to launch a single-tier state pension. The long-awaited changes will see everyone entitled to a standard rate of £144 a week in today's terms, as long as they have built up enough national insurance contributions, and will do away with the second state pension and contracting out.

Alongside the single-tier pension will come increases in the state retirement age.

Here we explain the new rules and look at the winners and losers.

So what is happening?

Currently, anyone retiring can qualify for a basic state pension worth up to £107 a week. They may also have built up entitlement to a second state pension through NI contributions. A higher earner can get a second state pension worth more than £150 a week on top of the basic state pension.

Rather than paying two separate sums of varying amounts, the government will offer a single pension worth up to £144 a week in 2012/13 terms at the outset. The change will be introduced in April 2017 at the earliest.

As previously announced, the state pension age will increase to 67 between 2026 and 2028.

Will I get £144?

Not if you retire before 2017, in which case you will receive pensions under the current system. When the change is introduced it will only affect new retirees.

If you retire after 2017 you will only qualify for the full amount if you have built up a full record of NI contributions. That will be 35 years – an increase from the 30 years currently needed. You can make up contributions for any years you have missed and get credits if you hold certain roles, such as caring.

The government says that by the 2040s it expects 80% of pensioners to qualify for the full amount. You are likely to be required to make 10 years of NI contributions in order to qualify for any state pension. If you have made fewer than 10 years you will not get any state pension. If you have between 10 and 35 years of contributions you will qualify for the pension on a pro rata basis, so 30 years' contributions will entitle you to 30/35s of the full rate, or £123.

Is £144 more than I am currently entitled to?

Yes, if the only pension you are on track to receive is the basic state pension. You can boost that with the means-tested pension credit, but even then the combined value is £142.70 a week, so slightly less than the flat-rate pension.

It is also more if you are self-employed or a public sector worker on a final-salary scheme. Currently you would only be entitled to the basic rate pension.

The answer would be no, however, if you are someone who may have been able to build up a healthy state second pension before you retired. According to the Pensions Policy Institute, in 2010 workers received an average of £33.19 a week from additional state pensions, which would take their income to less than the flat-rate pension. However, men typically received £54.10 a week, which would take them beyond the flat rate.

The government's own figures show that by 2060 more than 50% of new pensioners will lose at least £2 a week as a result of the abolition of the second pension. See below for more on the winners and losers.

What about the money I've already contributed for a second state pension?

As a gameshow host might say, "that's in the bank" – the government does not plan to take away money from anyone who has built up a second state pension. This means some people will receive more than £144 at the outset.

What about people who have contracted out?

Under the current system, people in final salary schemes were allowed to contract out from the second state pension, reducing their NI contributions as they did so. These people will see their contributions increase under the new regime, as will the employers offering the pensions. This could lead to even more employers closing final salary pension schemes. Hargreaves Lansdown estimates that where an employer keeps the scheme, an employee earning £25,000 will pay an extra £270 a year in national insurance.

Is the new pension a good thing?

Ultimately it should make things much less complicated and ensure the poorest pensioners get a decent income without having to fill in complex forms to claim pension credit.

Having a flat rate pension should make it easier for people to plan for retirement – they no longer have to worry that paying a small amount into a pension may cause them to lose better benefits through means-testing.

The government says that at least half of those reaching retirement age before 2050 are likely to be better off. However, in the long term more people will get lower pensions. There is also a danger future governments will start tinkering and the system will quickly become complex again.

Losers

Higher earners will eventually lose out under the new system because they will no longer be able to build up a second state pension. This can currently be worth more than £150 a week on top of the basic state pension.

Younger workers. The government says half of workers retiring in 2060 will be at least £2 a week worse off. This is mainly down to the abolition of the second state pension.

Public sector workers who are still working will pay higher NI contributions – currently they can contract out of the second state pension, but that option will go once that pension is abolished.

Married women without enough qualifying years to be entitled to their own single-tier pension will lose out. Currently, women who have no entitlement at all can get a state pension worth 60% of their husband's state pension, and inherit his pension when he dies, but the new rules will base pensions on each individual's NI contributions. A married couple will lose £28 a week, while a widow could lose £107 a week.

Winners

Married couples where both have qualifying years built up. A married couple currently gets £171.85 a week, but under the new system they could get up to £144 each, or £288 between them.

Self-employed people will be better off. They do not currently qualify for the second state pension and would only be able to receive more than £107 a week from the state if they qualified for the means-tested pension credit. Now they will qualify for the whole flat-rate pension.

People who have taken time out to care for family or bring up children should be better off. The government says about 750,000 women reaching state pension age in the first 10 years after implementation will receive an average of £9 a week more.

Public sector workers are likely to be better off when they retire, as long as it is after 2017. Currently they can only qualify for the basic state pension on top of their workplace pension, but in future they will qualify for the flat rate of £144.

The government reckons about 90% of those reaching state pension age in the first two decades after implementation will gain enough extra state pension over retirement to offset both the increased NI contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension.