A five-year increase to National Insurance contributions may leave thousands of older women struggling to make the additional payments needed to qualify for the new single tier state pension, leaving them with less to live on in retirement.
New flat-rate state pension
Starting in April 2017, retirees will receive a single flat-rate pension payment worth £144 in today’s money (expected to be around £162 in 2017). This will benefit lower earners, the self-employed and taxpayers in general – the new system will be less complicated than the current one.
Less positively,the overhaul will also increase the number of qualifying National Insurance (NI) contributions by five years. For more on how the state pension works, visit our guide, State pension explained.
One group of consumers is set to lose out even more from the reforms. Older women who are just a few years away from retirement and who have already suffered under state pension age increases, will be hit the hardest. This is because they will have to pay more to get a full pension.
Making up National Insurance contributions
Baby boomers who are a couple of years away from retirement have been told they’ll have to contribute an extra five years’ NI payments to qualify for the better, fairer flat-rate pension.
This affects women particularly badly, because they are more likely than men to have retired early or moved to part-time work, so they will struggle to make up the additional NI payments.
Women who have taken early retirement will done so on the assumption that they would have enough NI contributions to qualify for a full state pension, but this is no longer the case. Although some women may be able to buy back additional years by making voluntary NI contributions (currently £13.25 a week), some may not be able to afford to do so.
If you’re a woman with the current 30 years of NI contributions, you will still get an improved state pension in 2017. It will be around £123 a week – more than the current £107 weekly payment.
Double state pension hit for women
This bad news comes after years of pension changes that have negatively impacted women born in the 1950s. In 2011/12, the state pension age for women was between 60 and 61.
It was set to rise to meet the male state pension age of 65 by 2020, but the Coalition brought this forward to 2018. This meant that some 400,000 women in their late fifties saw their retirement age pushed back by as much as 18 months, and so they had to plug the income gap until their state pension arrives, such as by utilising their savings.
This increase to state pension age for women would have been more palatable if the flat-rate system had been introduced earlier, as the government suggested. However, because the single tier pension will not be in place until 2017, many women will be out of pocket for even longer.
Many women (and men) are caught in the gap between being able to draw their state pension earlier and being able to claim the new state pension – they will draw less generous pensions than people born a few years earlier or people born a few months later.
How to boost your income in retirement
Women caught out by the state pension overhaul have a few choices. They can work longer, either part-time or by being self-employed. They can access their savings earlier, if they’re confident that they won’t deplete them too quickly.
They can also access their personal pensions earlier. You can learn more about how your personal pension works with our Introduction to personal pensions guide.