The government has announced a big shake-up to pensions, with a new ‘flat-rate’ state pension expected to start in 2017. Will it mean more or less money in your pocket?
Pensions: they’re boring, they’re complicated… but they’re important. You may have heard on the news about the government changing the whole pension system, so we’ve outlined the main changes below.
If you’re a stay-at-home mum or self-employed, the pension changes contain some good news.
It’s worth getting up to speed on – because if you’re a stay-at-home mum or self-employed, the pension changes contain some good news.
Find out what the changes mean for you below.
The basic changes
The new ‘flat-rate’ pension, which is expected to be introduced from 2017, will be worth £144 a week in today’s money.
The current state pension is worth £107.45 a week – however, this can currently be topped up to £142.70. This is because the current pension system is split into three parts: a basic state pension, a second state pension, and pension credit. (Pension credit is a top-up payment made to the poorest pensioners).
The new flat-rate pension will replace all that, and will apply to all those who retire from 2017 onwards.
What does this mean for you? Find out below.
So the new pension will be worth £144 a week in today’s money. That’s more than the current means-tested pension of £142.70. So it’s good news, right?
Sounds like there’s a catch.
There is. Some people will lose under the new system, while some people will gain.
Let’s do the bad news first. Who loses under the new system?
First off, everyone will need to work longer to get the full pension payment.
Currently, you need 30 years of National Insurance (NI) contributions to qualify for the full state pension. Under the new system you will need 35 years of NI contributions to get a full pension.
If you have fewer than 35 years of NI contributions, your pension will be reduced on a pro-rata basis. If you’ve paid NI for less than 10 years, you won’t qualify at all.
Any more bad news?
I’m afraid so.
If you’re in a final salary pension scheme (and more than five million public sector workers and one million private sector workers are), then you will find yourself paying higher NI contributions. This could amount to a tax rise equivalent to 1.4% of your pay on which NI is levied.
Also, if you have a good second state pension, you may be worse off under the flat-rate pension (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).
However, if you’re currently contributing money to a second state pension, don’t worry – it won’t be taken away from you. You’ll still receive whatever second state pension savings you’ve built up (which means some people will receive more than the £144 flat-rate at the outset).
Ok, so who wins? You said there was good news for mums…
If you’re a stay-at-home mum, the pension changes will largely benefit you. This is because if you take time out of work to raise a family, you’ll no longer miss making NI contributions (and so end up with a lower pension because of your family commitments). Mothers will be treated as if they had been at work during the years they raise a family.
At the moment, the gaps in stay-at-home mums’ work records mean the average basic state pension for women stands at just £70.26 – far below the current maximum rate of £107.45.
This means that 2.8 million women currently receive a state pension of under £80 a week (mainly due to taking time off work to raise a family) compared with just 474,000 men.
The government estimates that 750,000 women who reach pension age in the decade after the new system is introduced (from 2017) will receive an extra £9 a week.
And it’s also good for the self-employed…
Yes that’s also right.
This is because the self-employed tend to get a lower state pension as they don’t qualify for the state ‘second pension’ – unlike company employees.
If you have had periods off work, periods of low pay or are self-employed, you will be better off with these new pension arrangements.
Does anyone else benefit?
The changes will be good news for a lot of married couples (providing each partner have enough NI contributions built up over the years). A married couple currently gets £171.85 a week between them, but under the new rules they’ll get £288 a week (£144 each).
But everyone is going to have to work longer before retiring, right?
Unfortunately that looks like being the case for most of us, yes…
Most of us will receive less money than current pensioners under the new system, with those born after 1980 being the hardest hit.
However, that doesn’t mean you should ignore the issue of pensions. – in fact it’s more important than ever to take a look at your pension situation.
The new £144 state pension payment is still way below the poverty line. So if you want to enjoy a comfortable retirement, you should seriously think about putting some money aside for a personal pension. If you need more information, see how to start a personal pension.