Pensions Minister Ros Altmann has made a written statement to the House of Lords saying that just over a third (37%) of those reaching pension age next year will be able to claim the new 'flat rate' State Pension in full.
The new State Pension is set to be introduced from 6th April 2016 and, in theory, anyone who has made 35 years of National Insurance (NI) contributions should qualify for the full rate.
However, the finalised system will actually not be quite that simple and previous estimates had already suggested that fewer than 50% of people would be able to do so.
This is because at some point during their working life, the majority have been ‘contracted-out’ of the additional State Pension schemes, so don’t qualify for payments from these upon retirement. This means that they would have paid National Insurance contributions at a lower rate – or some of their NI contributions were paid into a private pension instead.
These diminished payments will be taken into account when calculating the amount retirees will actually receive. But that doesn’t necessarily mean that they’re being left short-changed.
A complex system
A factsheet supplied by the Department for Work and Pensions (DWP) on the effect of contracting out states that the “rules of contracting out are very complex”, although in most respects these are the same rules that have stood since 1978.
An individual’s National Insurance record will determine the ‘Starting Amount’ of their new State Pension. This will take into account periods during which people were contracted out of the State Earnings-Related Pension Scheme (SERPS) between 1978 and 2001/02 and the State Second Pension or S2P during 2002/03.
[SPOTLIGHT]There are in fact two calculations that will be used: one based on the basic State Pension plus earnings from additional State Pensions (SERPS and S2P), the other based on National Insurance qualifying years minus contracted out ‘missed’ payments. Whichever is higher will be used as the Starting Amount.
The fact that certain people don't qualify for the full payout is not a case of Government withholding money, as those affected will not have made the same NI contributions as those who qualify for the full amount.
A DWP spokesperson said that the figures were revised annually to reflect latest assumptions, meaning that the percentage of those expected to receive the full State Pension differs from year to year.
“What people get from their State Pension does not give the full picture,” he said. “Both state and private pensions need to be taken into account.”
What this refers to is the fact that people who contracted-out of payments into the additional State Pension schemes will receive a lower State Pension. But they will therefore benefit from the private fund built up with money either not paid as National Insurance contributions at all or paid at a lower rate during the course of their working lives.
“The new State Pension will be easier to understand than the current system,” the spokesperson claimed.
The ‘flat rate’ idea
As time goes on, more people will be eligible to receive the full new State Pension, as they will not have been paying into, or had the opportunity to opt out of, SERPS or S2P.
So ‘flat rate’ will become an accurate description of how the State Pension is paid, excepting future adjustments to the State Pension system. But this will take some time to filter through to people retiring.
According to Baroness Altmann, nearly 90% of those reaching State Pension age would receive the equivalent, or more, of the full rate of the new State Pension once their private fund had been taken into account. “Most people who contracted-out of SERPS or S2P were required, as a condition of contracting out, to accrue an alternative private pension,” she explains. “This replaced the additional State Pension [for those people].”
You can get an estimate of how much new State Pension you'll get at the GOV.UK website.