Looking forward to getting £40 more a week when the State Pension increases next year? Think again. According to a report by Hymans Robertson, a whole swath of society will actually lose out when the new flat-rate Single Tier State Pension is introduced, some to the tune of a whopping £20,000.
According to the report, the new flat rate pension, designed to simplify retirement income, is far from simple. Currently, the State Pension is made up of the Basic State Pension available to all, and then topped up with Additional State Pension. This is determined by how long you have worked for – and made contributions via National Insurance through your wages. This unfairly impacts those who take a break from work such as stay-at-home parents, and the self-employed.
Under the new Single Tier these individuals will do better; the long term self-employed for example are estimated to benefit to the tune of £2,000 a year. Those not in employment or who have contracted out will similarly benefit. You will still have to have made National Insurance contributions for a minimum of 10 years however – which is where Hymans say the problems lie.
If you contracted out of making contributions for short periods during the Eighties and Nineties then you could be up to £20,000 worse off says Hymans.
Sue Waites, Partner at Hymans Robertson, said “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.”
Committee to Tackle New Pension Problems
The Work and Pensions Committee recognised the concerns of Hymans, among others and has set up an inquiry into the way the Government has communicated the changes, and the issues people are facing in understanding the transition to the new State Pension.
Committee member Jeremy Quin MP, admitted there had been “numerous major changes to pensions over the last few years.
“The introduction of the new State Pension from next April is another. It will affect millions of individuals of working age and it is critical that the changes and how they will effect retirement are clear and easy to understand. This inquiry will be looking closely at the implementation of the new State Pension and the Government’s communication strategy around it.”
Tom McPhail, Head of Retirement Policy for Hargreaves Lansdown says that the State Pension reforms will ultimately lead to a simpler, more equal system.
“No one disputes that the transition from the current system to the new one will involve complex adjustments,” he says. “What is incomprehensible though is that until recently the Department of Work and Pensions seems not to have made any meaningful plans to communicate these changes to the people who are actually affected by them.”
