State pension: No gain without pain

Most recently, pensions minister Baroness Altmann admitted on BBC Radio 4’s Woman’s Hour programme that there is a pervasive misunderstanding that everyone will get the full £155.65 per week from next April, whereas it is thought just over a third will.

The new flat-rate state pension is being phased in over five years. Those in receipt of their pension currently will not be affected.

For new retirees, a record of 35 years’ national insurance contributions will be needed for full entitlement. Both employee and self-employed NI contributions will count.

Under the current system, there is both the basic state pension after 30 years of NI contributions and the state second pension (S2P), which is an earnings-related pension for employees.

Perhaps in 35 years, when transition problems and winners and losers are all a dim and distant memory, it will have been worth it and the system will be simpler and cheaper to run

Occupational schemes were able to contract out of S2P if they provided members with approximately equivalent benefits in exchange for reduced NI contributions for members and the employer.

There is transitional protection so that new pensioners will receive the greater pension amount under either the old rules or the new, reduced for any periods of contracting out.

As with any changes to our pension system, there will be winners and losers:

And the winner is…

• Anyone who doesn’t understand or want to understand pensions, and just wants to know that they will get a certain amount (albeit that won’t be true for retirements for some years to come);

• Employers and occupational scheme members who have had to wrestle with the complexities of contracting out;

• People on means-tested benefits, such as pension credit, as the single-tier pension is pitched above the threshold;

• Recent NI changes mean that those with carer’s responsibilities, who claim carer’s allowance or child benefit, will have NI contributions credited that will count towards their flat-rate pension. This will affect more women than men;

• The self-employed, who were not eligible for S2P, and will now accrue additional pension;

• Women tend to earn less than men and those on low incomes get little out of S2P. Even though the state pensions have been reformed to improve outcomes, the single-tier system will do so faster.

But while some groups will see the new state pension as a positive, others might disagree.

These groups are losing out

• Women who could have used their husband’s/civil partner’s NI records to claim a higher pension;

• People who could get a full basic state pension after 30 years but may not have the 35 years needed for the flat-rate pension, perhaps because of unemployment or family responsibilities, often women;

• Young people who will have long careers of NI-paying work. Under the old regime they would have been able to accrue further pension if they did PAYE NI for more than 30 years but now will stop accruing further pension after 35 years, although they will still have to contribute;

• Higher earners who will no longer accrue salary-related benefits under S2P. Typically more men fall into this group;

• Employers whose occupational schemes will no longer be able to contract out of S2P and so their NI contributions bill will go up by 3.4 per cent unless they can amend their scheme to offset the cost. In particular this is likely to affect employers participating in public sector schemes where they are not able to alter the benefits or contribution rates.

Even for a simplification exercise, nothing is ever straightforward in pensions. Perhaps in 35 years, when transition problems and winners and losers are all a dim and distant memory, it will have been worth it and the system will be simpler and cheaper to run.

Though the chances of operating the new system for that long without altering it do not seem a good bet going by the past 35.

Tim Bateman is a partner at accountancy firm Mazars