From April 2016 a new single tier state pension came into force, set at £155.65 per week.
Men born on or after 6 April 1951 and women born on or after 6 April 1953 are entitled to receive the full single tier state pension if they have 35 years qualifying NI earnings.
Individuals who have paid NI contributions for at least 10 years will normally be entitled to a state pension however this will not be the full amount.
Transitioning to the single tier state pension inevitably means that some groups of people are better off under the new system while other groups of people are worse off.
Factors that could lead to individuals being better off under the single tier system include;
- Low amounts of additional State Pension on an individual’s NI record: likely to be low earners, people (usually women) who took time out of the labour market before 2002 to care for children; and the self-employed.
- Uprating: under the current system only the Basic State Pension is uprated by the triple lock (higher of 2.5% or growth in CPI or earnings) and the Additional State Pension is uprated by growth in CPI. This means that currently £119.30 of State pension is uprated by the triple lock. From April 2016 the whole of the new State Pension (£155.65) will be uprated by the triple lock i.e. an additional £36.35 per week compared to under the current system.
- Ability to build up years in the new State Pension: anyone with less than the full State Pension in 2016, and who is below State Pension age in 2017, can build up extra years before they reach State Pension Age. So anyone with less than £155.65 per week but more than 30 years in the system can build entitlement under the new State Pension at around £4.45 per week for each qualifying year. This will benefit people who have been contracted-out or have built up low amounts of Additional State Pension in the past.
- The value of the new State Pension: people who would not have built up additional pension after 2016 under the current system (mostly contracted-out or self-employed people) would build up £4.45 per week rather than less than £4 per week which is the value of a Basic State Pension year.
Factor that could lead to individuals being worse off under the singler tier system include;
- Minimum qualifying period: under the new State Pension, people with fewer than 10 qualifying years will not receive any State Pension. Under the current system there is no minimum qualifying period.
- End of ability to derive entitlement: under the current State Pension system people with low numbers of qualifying years can derive entitlement to the Basic State Pension . People can also inherit Additional State Pension. Under the new State Pension these provisions will be more limited and transitional in nature.
- Uprating and revaluation: protected payments (paid where people have built up more than the full new State Pension based on the current value of their NI record) will be revalued between 2016 and State Pension Age by growth in CPI. Under the current system this part of the pension would be revalued by earnings growth, which tends to be higher than growth in CPI. Some people with Guaranteed Minimum Pensions (GMPs) might also receive a notionally lower outcome due to the end of the complicated interactions between additional pension and contracting-out uprating.
- Building up new State Pension years: people will not be able to build up more new State Pension once they reach the full amount. Under the current system, people can build up additional pension every year until State Pension Age. So in the long-term the maximum amount of State Pension that can be built up will be lower.
- The value of a new State Pension year: under the current system people paying the full rate of NI with fewer than 30 qualifying years are building up Basic State Pension at just under £4 per week for each qualifying year and additional pension of at least £1.80 per week for each qualifying year. Under the new State Pension the value of a new State Pension is £4.45 per week for each qualifying year.
Impact on the single tier state pension of being contracted-out
Where an individual has been a member of a contracted-out pension scheme at any point in their working life (all the main pension schemes in the HE sector were contracted-out) this will impact on the amount of the single tier state pension they will be entitled to receive.
Further information on contracting-out and the single tier pension can be found here.
State pension statement of entitlement
The government is keen to ensure that people can check how much state pension they may get under the new system. Individual's are aged 55 or over can now request a personalised new state pension statement.
These statements will now include information on any deduction to the state pension as a result of being a member of a contracted-out pension scheme.
The statements also give additional information about how people may be able to improve their state Pension before they reach SPA.
Changes to the state pension age
The current state pension age of 65 will rise to 66 in April 2020 and is due to rise again to 67 between 2026 and 2028. A further increase in the state pension age to 68 is expected during the 2030’s and to 69 later in the 2040's. More information on the UK wide state pension scheme can be found here.
You can use an interactive State Pension age calculator to work out your state pension age.
Further information on the new single tier state penson can be found here