New government figures imply that the full value of the new flat rate state pension – that should have been available to all – will not be received by around 2 in 3 retirees.
Introduced in April next year, the new flat rate pension offered by the state should have stood at £151.25 per week. It will be available to all who have made 35 years’ worth of qualifying National Insurance payments, with Iain Duncan Smith stating “The single-tier pension will mean people have certainty in what they can expect from the State. Thirty-five years’ worth of National Insurance contributions will mean a full basic state pension”.
But new government figures have implied that around 100,000 fewer people than first expected will be able to receive the full amount due to a lack of contributions. There’s only around 220,000 of the roughly 600,000 people hitting pension age in the 2015/16 tax year who will be able to claim the full £151.25.
How has there been a lack of contributions from so many people? There are certain employees who may have been able to opt-out of certain extra benefits throughout their working life: this includes the old second state pension. By opting out they could pay less NI, but the introduction of the new flat rate does not account for this.
Typically, those who opted out may have had generous final salary pensions to look forward to, but some of those who contracted out were employees with stock market-linked workplace pensions.
The government has defended this decision with the belief that those who opted out of the extra NI payments should have been able to make alternative provisions and build up a bigger private pension fund for the purchase of an annuity or for pension drawdown purposes.
It’s now being predicted that to get everybody onto the full state pension rate, there will be a huge phasing period, with one in seven still not qualifying for the full pension even as far into the future as 2060.
The way that eligibility is calculated has also come under fair, with Tom McPhail, head of pension’s research at Hargreaves Lansdown saying “the link between the National Insurance contributions people pay into the system and their impact on the new flat-rate state pension entitlement appears to be very tenuous”.
Most people would assume that, because you need 35 years’ worth of NI contributions, should you have paid 30 years’ worth of contributions, contracted out for 5 years, then paid an additional 5 later in your career, you would be eligible for the full state pension: not so.
Some of those not eligible for the full £151.25 may have only opted out briefly – still holding at least 35 years’ worth of contributions – but the Department of Work and Pensions confusingly seems to be assuming that these people opted out for their entire career, stating that those who contracted out benefited from lower NI payments in order to make alternative pension provisions: “People who spent time contracted-out either paid NI contributions at a lower rate, or some of the NI contributions they paid were used to contribute to a private pension, which they will also benefit from when they retire. Both state and private pensions need to be taken into account”.
It seems as though the Government are penalising those who weren’t lucky enough to own a crystal ball and couldn’t see into the future plans of the DWP.
You can find out what you’re eligible for by requesting a pension forecast from the DWP: https://www.gov.uk/state-pension-statement
This article was created with help from Ryan Smith, part of the content development team at Compare Annuity, providing a free online annuity calculator for those approaching retirement.