Half retiring in next five years won't get full state pension: youngsters even worse off

A government report into the new 'flat rate state pension' has revealed that the system that sounds like it will ensure everyone receives the same (more generous) sum in retirement will do nothing of the sort. In the early years it will mean half of all people don't get the full amount, and in the later years it will ensure that millions of people are worse off than they would have been under the current system.

The new 'flat rate' pension kicks in on 6 April. The government has said that everyone who qualifies for the full rate will receive £155.65 a week, which is far higher than the current basic state pension, and has been touted as a major breakthrough for those who suffered under the old system - including women and the self-employed.

Who could you get less?

The initial problem is that not everyone qualifies for the pension, and in the early years half of all people will receive less than the full amount.

There are two major groups who miss out. Those who have fewer than 35 years of National Insurance payments won't get the full pension (up from 30 years under the current system). Those with fewer than ten years will receive nothing at all.
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Those who 'contracted' out of the addition state pension will also receive less. This is because the government reasons that people who contracted out received a benefit as a result. For some people, their employer did it in return for providing a final salary pension, so they paid lower national insurance rates and built up a workplace pension. For others, their contributions were paid into a private pension, which built up benefits elsewhere. The government wants to reflect the pensions people built up as a result - so will reduce the amount it pays in state pension.

The government has said that in its defence, 75% of people reaching the retirement age within the next 15 years will be better off than they would under the current system. However, from that point, the proportion will diminish.

Younger people

The government has admitted that those younger than the age of 43 will be worse off - by between £11 and £15 a week - than they would have been under the current system. It means around 16 million younger people will be worse off because of the changes.

Shop around for a better pension income

The younger you are, the more you stand to miss out. The government figures show that 53% of 43-year-olds will receive £572 a year less - or £17,160 over the course of a 30-year retirement - than they could expect under the current system. Meanwhile 76% of 24-year-olds will receive £884 a year less.

The government hopes that auto-enrolment - which automatically puts people into a workplace pension unless they specifically choose to opt out - will help close the income gap.

Why?

The fact that younger people will get a smaller state pension shouldn't come as a shock, because when George Osborne announced the changes, he always said the new system was designed to be 'sustainable' and that the government wouldn't be spending any more on state pensions than it did on the current system.

The new system wasn't designed to be more generous; it was supposed to be fairer. As a result the government has picked the groups it decided needed more 'fairness', and picked the groups who should pay for the change. If you're set to receive less in retirement as a result of the change, it's because Osborne has decided you can afford it.

Perhaps the reason this is coming as such a surprise is that communications have been so poor. By calling it a flat-rate state pension, people expected it to be equal, and by highlighting how much more generous it is than the basic state pension at the moment, people expected it to be generous.

As Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown, says: "This policy is cost-neutral, which always meant there were going to be losers as well as winners. The further into the future we go, the more losers there are."

"The message to those in their 20s today is that you can still look forward to a state pension but it'll be less generous than that enjoyed by today's pensioners. Work on the assumption that it will provide a foundation amount for most people but it will fall well short of an adequate retirement income; if you want a good standard of living in retirement you need to look to your own private savings."