State pension reforms – all the changesWhich? looks at the reforms and how they affect you
14 May 2013
The government has announced a raft of reforms to the state pension this year, with the changes due to take place from April 2016. Here’s how you’ll be affected.
Flat-rate state pension
The largest overhaul to come from the reforms, this will mean that everyone who qualifies for the state pension will receive the same amount of £144 a week.
This replaces the current basic state pension of £110.05 per week, which is currently supplemented by pension credit and the additional state pension, known as state second pension (S2P). You can read more about S2P in our guide, Contracting out of state second pension.
The reforms do not include any changes to the state pension age, but this will be increasing to 66 for men and women by 2020, 67 in 2028 and will be linked to longevity thereafter.
State pension reform and contracting out
The reason for introducing a flat-rate pension is simplification. Currently, the amount people can claim from the state varies wildly – S2P can increase your weekly pension by as much as £161. The fact that many people choose to ‘contract out’ of S2P into a workplace scheme adds a further layer of confusion.
Contracting out will also end when the reforms are implemented in 2016. If you’re one of the 6.4 million people who has been contracted out, you will be able to keep the pension you’ve built up – but you’ll receive a lower flat-rate pension to compensate for the fact that you haven’t been contributing to S2P.
You will also pay more National Insurance than you did previously.
Pension credit changes
The flat-rate pension will also mean an end to the savings credit element of pension credit, which is split into guarantee credit and savings credit. You can read more about pension credit in our guide to Pension credit.
Currently, you can claim guarantee credit to top up your basic station pension to £145.40 weekly if you're a single person, and £222.05 if you’re a couple, provided your income is below these weekly levels.
You can claim savings credit, worth £18.06 for a single person and £22.09 for couples, if you have an income higher than the basic state pension or a small amount of savings. However, from 2016, savings credit will be abolished.
Guarantee credit will remain as a safety net to lower-income pensioners.
National insurance qualifying years increase
At the moment, you need to have made 30 years' worth of National Insurance contributions to claim the basic state pension. But from 2016, this will increase to 35 years, meaning that some people may not be eligible for the new flat-rate payment. Those who claim state pension before 2016 won't be affected.
If this is the case for you, you could try boosting your state pension. You can do this for the previous six years' National Insurance contributions, so this could be worthwhile if you were on track for 30 years' worth of contributions but now need 35.
End to married person's allowance
The most recent announcement was that the married couples' allowance, which currently allows people who haven't made NI contributions to claim a weekly state pension of £66 based on their spouses contributions.
However, it was announced last week that this will be axed in order to save hundreds of millions of pounds in payouts to spouses who live abroad.
Winners and losers from state pension reforms
- The self-employed. Currently, they receive a relatively low state pension because they can't build up S2P, but now they will be on an equal footing with employees.
- People who have taken time out from work, for example to care for children. The years they spend doing this will be recognised under the new system.
- Low earners. The basic amount is increasing from £110.05 (in 2013/14) to £144 a week, which is good news for people on lower incomes.
- Existing pensioners. They won't be eligible for the new flat-rate pension.
- Younger people. State pension age changes mean they are likely to be in their seventies before they can retire.
- Contracted out pensioners. They pay lower National Insurance contributions now, but these will rise after 2017 – and employers will not increase scheme benefits proportionately.
- High earners. Currently they can get a higher state pension by building up S2P, but they will get no more than the flat-rate amount in future.