A new flat-rate state pension will benefit some employees, but may mean a 1.4% rise in National Insurance contributions for those that are currently contracted out.
State pension changes
The government has announced a new flat-rate state pension which will replace the current system of basic state pension and second state pension (S2P). Set at £144 a week (in today’s money) the new state pension will be the same for everyone, although those already claiming state pension will continue to get basic state pension and those who have built up S2P entitlement will get this too.
The main winners under the new system will be those who have not built up any entitlement to S2P, such as the self-employed, and people who have no other income except state pension. At the moment, the government provides pension credit to top up low incomes to a minimum guarantee of £142.70.
This means tested benefit is not claimed by many who are entitled to it however, with many of the most needy missing out. The new flat-rate scheme guarantees a higher income automatically without the need to apply for it.
If you have a question about the state pension changes, or any other financial matter, give the Which? Money Helpline a call. Our team of qualified experts can help you with any question. Sign up to Which? for just £1 and speak to one of our experts.
Contracting out to end
The change to a flat-rate pension was introduced by the Chancellor George Osborne, when he signalled an end to ‘contracting out’ for those in defined contribution (money purchase) pension schemes from April 2012. At the moment, employers can divert some national insurance contributions to their own pension schemes, in exchange for which employees waive their entitlement to S2P.
This means that they pay Class 1 National insurance at a rate of 10.6% rather than the 12% that ‘contracted in’ employees pay (building up an entitlement to S2P in return).
From April 2017, all employees, including those in defined benefit (final salary) pension schemes, will pay the same rate, meaning an increase in National Insurance contributions for those contracted out. Second state pension will no longer be accrued, although existing entitlements will be honoured.
More qualifying years required
Another change announced by the government is that the number of qualifying years required to build up entitlement to a full state pension will be increased from the current 30 to 35.
The age at which you can claim state pension (state pension age) will also rise, to 65 for women by 2018 and to 66 for both men and women by 2020. Between 2026 and 2028 it will rise again to 67.Further increases are planned to reflect increasing life expectancy, although the details of this have yet to be finalised.This story was updated on 21/01/2013 to state that all employees will pay the same rate of National Insurance from April 2017.