State Pension: many not getting the full flat-rate

Many retirees are surprised to learn they won't get the full new flat-rate State Pension – at a time when more people are relying on it as their sole source of income – it has been claimed.

Most people who retired last year didn’t get the full "flat-rate" State Pension of £155.65 a week (rising to £159.55 later this month), according to the Department for Work and Pensions (DWP).

Over 90,000 (59%) of those who started claiming the State Pension between 6 April and 31 August 2016 received less than the flat-rate, meaning just 41% got the full amount.

The figures were revealed by a Freedom of Information request from The Times.

Then-Chancellor George Osborne pledged the new rate “would be simple; it would be based on contributions; it would be a flat rate, so people know what to expect”.

However, it seems many people expecting the full rate have been surprised to learn this won't be the case.

It’s particularly concerning for anyone reaching retirement age who thought they were due a larger pension payout but don't have enough time to plug the surprise gap in their income.

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What do I need to know about the new State Pension system?

 To get the full rate, you must have accumulated 35 years of National Insurance contributions – five years more than under the old system.

If you have less than 10 years of contributions, you’ll receive nothing. Anyone in-between will get a lower proportion.

It was supposed to be a simpler version of the old system, which was made up two parts: a 'basic' and an 'additional' State Pension.

However, Ros Altmann, the former pensions minister, claims the new system is "still riddled with the complexities of the old one”.

Where the confusion arose

Those who haven't received the full amount either didn’t have 35 years of contributions or were “contracted out” for part of their working life.

You may have been contracted out if your employer chose to offer a company pension, which in most cases had to provide a pot at least as good as the additional State Pension.

If you were contracted out, you didn’t receive the additional State Pension and paid less in National Insurance. Employees paid lower National Insurance so that they could build up part of their State Pension in a private pot instead.

In most workplace pension schemes, there was no choice as to whether or not you were contracted out. However, it has been abolished under the new workplace pension.

Commenting on the findings, Altmann stated: “What the Government could and should have done is try to help people understand the process of contracting out, which meant you pay less National Insurance in order to build up some of your State Pension in a private scheme.

"First of all, nobody knew they were paying less National Insurance, and they didn’t realise some of their State Pension was included in their private scheme.

“The new State Pension was mis-sold to people. If people were expecting the full £155 from the state they might be expecting more than they are going to get."

Richard Parkin, head of pensions policy at investment firm Fidelity International, adds that the issue is mostly problematic for older workers. 

“For somebody starting work today, the system is pretty straightforward," he said.

"The challenge is for people who have worked under the previous system. It will take time before we get to a position where everybody has the same State Pension."

By mid-2030, the DWP says it expects 85% of retirees to be receiving the full-rate State Pension.

Increasing reliance on State Pension

New figures, also from the DWP, show that over a million pensioners rely solely on the State Pension for their income, the highest number in 20 years.

The amount of people who don’t have additional cash in savings or private pensions has risen by a quarter in the past six years.

Many are widows relying on their spouse’s pension to top up their income.  

The average State payout (includign benefits) is £188 a week, according to the Government report.

How much will you get?

You can use the Government’s website to see how much you’ll get from the State Pension and when you can expect to start claiming it.

Be warned that this figure isn’t adjusted for inflation and is only based on the current law.

However, it should expose any gaps in your National Insurance contributions, giving you the opportunity to fill them in with voluntary contributions.

Your online record will tell you how much each year will cost.

Find out more at How to get a State Pension forecast.

Plan for your future: compare SIPPs on loveMONEY (capital at risk)

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