New £144 State Pension: all you need to know

The Government has confirmed plans for a new flat-rate State Pension of £144 a week.

A new flat-rate State Pension of £144 a week will be introduced in April 2017, the Government has announced.

The changes will see the biggest ever reform to the pension system in the UK. It’s hoped the entire system will be simplified under these new plans, which were first mooted in 2011.

What is changing

Pensioners can now get £107.45 a week if they have the right number of qualifying National Insurance (NI) years. The amount can also be topped up to £142.70 with both pension credit and the Second State Pension.

The pension system in the UK has been slated because of how complicated it is to work out. This is why a single flat-rate amount is to be brought in.

Pensioners who reach State Pension age from 6th April 2017 will be able to claim the new amount.

But the new system has been criticised as it makes no distinction between rich and poor pensioners. Those retiring before 2017 will miss out on the increased amount available, while low earners and the self-employed will benefit.

The State Pension age is also changing. It is rising to 66 for both men and women by 2020 and should go up further to 67 by 2028.

National Insurance contributions

Changes are also happening to the number of years of NI contributions a pensioner needs.

Pensioners will now only be able to get the full State Pension if they’ve paid NI contributions for 35 years, a five-year increase from the current level. The minimum number of years to start receiving a State Pension will be ten.

Many pensioners currently opt-out of receiving the Second State Pension because their final-salary pension schemes pay the same amount. This means they pay less money in NI.

As the Second State Pension will be phased out under the new system, everyone will be paid the same amount and there won’t be a choice to opt-out.

It’s unclear if these people will start receiving a full flat-rate pension if they haven’t made enough NI contributions. If they are able to get this higher amount, it's likely they'll need to pay more in NI contributions.

Who will benefit from the changes?

A clearer pension system should benefit everyone, as at the moment it’s extremely complicated.

“Despite years of tinkering, we still have a State Pension system that is not fit for purpose.  It is creaking at the seams. It has been patched up so many times and is now just a complex web of different parts that almost nobody understands,” explains Dr Ros Altmann, Director General for Saga.

In particular the self-employed will benefit as they are currently only able to receive £107.45 a week as they aren’t able to build up a Second State Pension. Those pensioners who are paid less than £144 a week will also benefit from a higher allowance.

Women have traditionally lost out in the current pension system, especially those approaching retirement, because they will often take time out of work to care for children which means they have a smaller NI pot built up.

In 2010 for example, 30% of women retiring had entitlement of less than 60% of the basic State Pension, compared to 2% of men. This will change under the new system as everyone will be able to claim the flat-rate – if they have enough qualifying NI years.

However, people with less than ten years' NI contributions will lose out because they won’t be able to claim. Higher earners with a pension allowance of higher than £144 will also lose out as this will be reduced to the flat-rate amount.

“With these proposals, however, future pensioners should eventually have a system that is simple, clear and understandable. They will know the deal. It will take time to get there, but we will be on the right path,” adds Altmann.

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