The New State Pension; winners and losers!

BBC news

Tune in at lunchtime today

Today I am going to be on TV, which is making me nervous-I’m surprised how nervous – I expect it’s the fear of the unknown and it’s about having to make stupid choices (tie/no tie; white or patterned shirt etc). All of which matters nought!

What matters is that I have a tiny window on BBC News this lunchtime to say something meaningful about something meaningful;- the new state pension that will arrive on Wednesday.

To stop me waffling, I’ve been asked to stick to two questions;

  1. Why won’t everyone get £155 a week?
  2. Why are some people going to get less in their April pay cheque (and is this a stealth tax)?
Tapper

Is that clear?


Why won’t everyone get £155 a week?

First the easy bit – the principles behind the new state pension

The simple answer to what is a very difficult first question is that the state pension we get is linked to what we’ve contributed by way of national insurance or when we didn’t pay NI but contributed to our welfare state in other ways (for instance in trying hard to get a job).

So some people won’t have contributed as much as others. The system is designed to reward those who have contributed most according to their means.

And the entitlement someone will get if they retire on 6th April will be based entirely on history. They will get the higher of what was due to them under the old system and what is due to them under the new state pension. That is not Government propaganda, that is fact.

The new state pension of £155.65 will only be paid in full to those who have fully contributed (with a full national insurance record). Those who chose to pay reduced rates of national insurance will see this reflected in their state pension.

For people retiring in May 2016 onwards, the amount of state pension we get will be based on what we did before April 2016 and what we did after and the further we get from April 2016 the less important our contributions to date will become. Many people in their twenties will have their pensions based entirely on the new formula.


Now for the tricky bit – the application of these principles

Under the old rules people would have got old basic and some SERPS and/or S2P, (with SERPS/S2P reduced if contracted out. This total may be more or less than the new flat rate (which is higher than the old basic).   


Those better off under old than new will get old.

The “old rules” figure will be highest for those higher earners who were never (or very rarely) contracted out.  For them the amount  under “old” will probably be higher than the new basic so they’ll get “old”

Even people on more average earnings with good contribution records and not contracted out much will have higher state pensions from “old” than the new basic.

So these sorts of people will get more than the new basic.


Those better off under new basic than old basic will get new

On the other hand Some people will see the old rules entitlement lower than the new state pension.

This will include at one extreme those people who were always self employed, (so never had an entitlement to SERPS or S2P).

Assuming  these self employed people have  contributed for enough years to be entitled to the full basic pension, then their old basic is less than their new state pension and they will be entitled to the new state pension (albeit without all the extra entitlements earned by paying full national insurance)

The same goes for some employed people with very small amounts of SERPS/S2P.These people will get what the experts call the “new basic” (£155) which is more than they’d have got from their “old basic” entitlement.

Then there are the in-between ers!

These are the most complex group people – those who were contracted out of NI for most of much of their working lives.

As a result the SERPS/S2P part of their old state pension is reduced to take account of their choice to pay lower NI contributions and build up some private pension instead.

 Their old rules state pension may be close to that for self employed people.  Under the new rules, a similar sort of contracted out reduction applies (although for technical reasons the precise amount is different).  

So even though they might have contributed for the full 30 years for the new basic, their full entitlement will be reduced by this reduction.  These people will find their old rules amount is higher, but still less than the full new basic amount (£155)


Why are some people going to get less in their April pay cheque (and is this a stealth tax)?

The second question is a lot easier to answer.

A lot of people pay reduced rate national insurance today and won’t from tomorrow (or at least from Wednesday (6th April)! They will pay an extra 1.4% national insurance on some of their earnings and may end up – up to £37 pm worse off in their pay-packet

The Guardian has called this a stealth tax but it isn’t. Though it brings in £5.4bn into the Exchequer, the money flies out again on increased state pensions for those who are retiring from May 2016.

It’s back to the contributory principle that I talked about at the top of this article.

Oddly the self employed will continue to enjoy the cashflow advantage of paying reduced rate national insurance but will get full entitlement, so for them this is more for the same- a welfare hand-out without a tax-hike!


More generally are we getting the same value for money from our national insurance contributions?

Well we’ve seen some big increases in NI over the past few years. The increases in NI contributions should, other things being equal, have led to a large surplus in the NI fund, and as a result the NI rate should now- according to actuarial projections- have been reduced a bit.

So there could have been  a bit of an offset to the increase being faced by contracted out employees and their employers.  

This hasn’t worked its way through yet and with Government finances being what they are, don’t hold your breath. While the end of contracting-out will mean less in some people’s pay-packets – this is not as stealth tax.

The overall increases in recent years in national insurance don’t appear to have given us a cushion to soften the blow, and some will moan about that!

But hey – the people losing out are almost certainly the best pensioned. The real problems are for those for whom the new state pension is all they have.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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10 Responses to The New State Pension; winners and losers!

  1. Hi Henry,

    Regarding where you mention better off under old than new I hope you mention that under the existing system because they can receive a high additional state pension they can be about £125 per week better off than the new state pension

    Young people who are just starting out in work based on current rates be between £2000 to £3000 a year worse off under the new state pension when they reach state pension age..

    Will you mention that people in the private sector will loose cost of living increases on their GMPs up to about £20,000 in value where someone in the public sector who reaches state pension age prior to 6 December 2018 will definitetly have their increases paid for the rest of their life as announced by the Treasury on the 1st March 2016 and possibly for other public service employees who reach state pension age on and after 6 April 2018.

  2. Gerry Flynn says:

    Henry

    “As a result the SERPS/S2P part of their old state pension is reduced to take account of their choice to pay lower NI contributions and build up some private pension instead”, that is complete rubbish. Back in the late 70s early 80s a lot of employees T&Cs meant that they had to join the company pension scheme, the fact that the pension scheme was C/out was due to the encouragement of the then Government, nothing to do with the employee making a conscious decision.

  3. Gerry,

    If I remember correctly, if you did not sign on the dotted line you were not allowed to continue in the scheme.

    I think I still have a copy of the form I had to sign.

    • henry tapper says:

      I appreciate that some people were contracted out compulsorily or with extreme coercion but this was a long-time back and the option to opt-out of a scheme has been the norm for some time.

      In practice , hardly anybody went into a DB scheme and got less for doing so, the problems with “bare comps” is another matter but we are dealing here with April 6th 2016 and I have about 2 minutes on the TV!

      • Henry,

        If I had not been forced to contract out I think I would have been able to receive by full SERPS entitlement as it was then called. All it would have cost me is the loss of my NI rebate.

        The full SERPS would be very nice to have. All I received was about £4 additional state pension when I reached state pension age in 2005 as I had been contracted out all my life which has now grown to roughly £30 pw because it includes my GMP increases so helps to show what GMP increase people will loose in future.

        It was the company who mainly gained because they received a larger rebate than me that helped offset the cost of running the pension scheme. Their NI rebate was a bribe to take on the libality of the GMP within the pension scheme but not the cost of GMP increases which were supposed to be paid in full via the state pension in those days. No pre and post 88 GMPs.

  4. Alan Chaplin says:

    good luck Henry!

  5. Henry,

    I forgot to mention that as far as I am aware the DWP has not written to anyone to tell them that they will be losing valuable benefits such as GMP increases and inheritance and derived rights as recommended my the National Audit Office in their report. Something else you can mention.

  6. henry tapper says:

    I would like to include your points about GMP Chris, but may not have time!

  7. Steve Beetle says:

    1.4% more in NICs I fear, not 1.2%!

  8. henry tapper says:

    1.2 now 1,4% – thanks all!

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