The government has finally announced details of its plans to reform the state pension system. But who will lose and who will gain from it?
The coalition says that from 2017, everyone who retires will receive a flat-rate pension worth £144 a week in today’s money.
The new, simpler set-up signals the end of the means-tested pension credit, which is currently available to those on low incomes.
And it also means that the state second pension (S2P – previously known as Serps), which allows higher earners to accrue extra pension, is being phased out.
The flat-rate pension means that those approaching retirement will have a much clearer picture of how much money they will get from the state.
This is in stark contrast to the current, hideously complicated system.
Qualifying for the new pension
Although the new pension has been described as universal, this is not exactly the case.
You will only get the full £144 a week (this figure will be increased in line with inflation every year) if you have managed to make at least 35 years’ national insurance (NI) contributions.
At present, the requirement is just 30 years.
Under the new system, those who have between 10 and 34 years’ NI will receive a proportionate amount of state pension.
Those with fewer than 10 years will get nothing.
Good news for carers & self-employed
At the moment, the only way to accrue a year’s NI contributions for state pension purposes is to work.
But this is changing. From 2017, people who spend time out of the workforce looking after children or other relatives will also be credited with NI.
And under the current system, self-employed workers cannot build up extra pension entitlement through S2P.
But the reforms mean that this group will be eligible for the full weekly payment when it is introduced.
Who will miss out?
The £144-a-week new pension is clearly much more generous than the current rate of just over £107 a week.
But the bad news for anyone who has already reached state retirement, or who will do so before 6 April 2017, is that they are stuck with the present system.
They will continue to be able to claim pension credit if necessary, and they will retain any current basic and S2P pension entitlement.
So none of this group will be worse off, but it will be no surprise if they feel some envy towards those who qualify for the new system.
When will I retire?
The state pension ages for men and women are changing at the moment.
Women’s pension age was 60 until 2010, but over the course of this decade it is being raised to 66.
Men’s pension age, which is currently 65, is also being increased – between 2018 and 2020 – to 66.
If you’re unsure when you’re going to retire, check this government website.
The government is planning a further increase, to 67, in 2028.
After that, rises in the state pension age will be linked to increases in longevity in the UK population
Are these changes good or bad?
In terms of simplifying the system, the changes have been broadly welcomed.
Some higher earners may end up worse off than they otherwise might have been in future because of the scrapping of S2P.
But this appears to be a price ministers are happy to pay to see the end of means-testing.
The problem with the means-testing of pension benefits is that it can act as a deterrent to saving.
Under the current system, for some people who are within a few years of retirement, it can be a better idea to spend now rather than save for their old age.
This is because any pension they build up might simply result in them getting less pension credit.
Now that these changes have been announced, however, the message is clear: if you are retiring after April 2017, you will not be penalised in this way for saving.
With annuity rates reaching new lows recently, this is an ideal time for the government to stress the importance of saving for old age.