Most people worse off under new state pension, actuaries claim

26 Oct 15

The new single tier state pension system will leave most people worse off and remains fraught with complexities, according to new research.

Actuaries Hymans Robertson found that the single tier system, due to come into effect in April 2016, brings numerous complications and will see some people worse off by up to £20,000.

Sue Waites, partner at Hymans Robertson, said: “The introduction is hailed as an exercise of simplification, but working out who the winners and losers are is incredibly complicated. The picture is far from clear, particularly for those currently close to the state pension age [SPA].

“Over the long term, broadly speaking, the majority will lose under the new state pension. Under the current regime, although basic state pension accrual is limited to 30 years, additional state pension can be accrued over an entire working life (potentially up to 50 years). Under the new system it will be capped at 35 years with no additional state pension, so there will be less scope to build up a more generous entitlement.”

She said the “widespread expectation” that everyone who reaches state pension age from April 2016 will move from a basic state pension of £115 per week to a new flat rate of £151 per week is quite different from the reality, and warned of “unpleasant surprises” for some.

The firm’s research found that the main “winners” under the new system will be those who do not currently accrue additional state pension ‒ typically those who are self-employed or unemployed and not entitled to credits towards additional state pension ‒ who are expected to be £2,000 better off per year.

The majority of those who have “contracted out” ‒ or have opted to forgo part or all of their state second pension in exchange for lower National Insurance contributions and are receiving extra pension from elsewhere ‒ will also build up more state pension per year than they do currently.

Hymans Robertson found that everyone else’s pensions will suffer under the new system, especially in the long term, with less than half of those reaching state pension age shortly after 2016 earning the full amount. The actuaries warned that some who contracted out for a short period in the 1980s or early 1990s could be as much as £20,000 worse off.

With the introduction of the single tier system next year the option to “contract out” of the supplementary second state pension will disappear, leaving employers and employees no choice but to pay the NICs.

Lower earners who have opted to contract out and receive a state pension top up under the current system will also be hit by the changes. As the option to contract out is removed, the research found that they will pay higher NICs and see an equivalent reduction in take home pay but still build up less state pension each year.

Those who have already accrued £151 or more a week in state pension will also pay more NICs for no additional benefit. Waites said these individuals may currently be accruing additional state pension but “will not build up anything further from April 2016”.

Finally, the research found that those who are approaching state pension age and whose starting value is less than the full single tier amount also stand to lose as they do not have enough years left to make up the difference before receiving their pension.

Waites said: “The Department for Work and Pensions has been a bit slow off the mark in bringing these issues to the public’s attention. It is good to see [pensions minister] Baroness Altmann going on a crusade recently, and we hope it will provide individuals with much needed support to help them understand what pension they will ultimately receive from the state.”

Responding to the report, pensions minister Baroness Altmann said the report represented “irresponsible scaremongering”.

“Millions of people including women and self-employed workers stand to benefit from the new rules and around three-quarters of those who reach State Pension age in 2020 will have a higher State Pension than they would have done under the current system.”

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