Most people are 'worse off under single tier pension'

If you were hoping that the single tier pension would be a simple and generous solution to state pension confusion, then you're in for a disappointment. A new study has revealed that it's not simple, and it's not generous. In fact, most people will be worse off under the new system

Hymans Robertson said that the first problem is how few people will initially qualify for the full flat rate pension: fewer than half of those reaching the state pension age shortly after 2016 will qualify for the full new rate (thought to be about £155 a week).

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Sue Waites, Partner at Hymans Robertson, said: "There's a widespread expectation that everyone who reaches state pension age from April 2016 will move from a basic state pension of £115 to a new flat rate of £151 per week. The reality is quite different. The transition to the new State pension brings many complications, particularly for those approaching State Pension Age. Some will be very surprised at how much they actually get."

Why?

The number of people with fewer than 35 years of National Insurance contributions will be partly responsible for this. However, the big problem is the number of people who have opted out of the state second pension at some point in their career - which the government will reflect in lower state pension payments.
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Those who will be hit hardest by this will be those who contracted out for short period in the 1980s and early 1990s - who could be £20,000 worse off over the course of their retirement.

Those on low earnings will suffer too. Under the current scheme they receive a state pension top up; but this will not exist after April 2016. It means that from April they will have to pay higher National Insurance contributions, so they'll take a cut to their take home pay now in order to secure less income than they would have had under the old system.

Meanwhile, those on higher incomes will be worse off, as those who have accrued £151 a week by the 6 April 2015 through payments into the state second pension, will have their benefits frozen at this point. It means they'll have to continue paying National Insurance until retirement, but will receive no additional benefit from it.

Waites adds: "Over the long-term, broadly speaking, the majority will lose under the new state pension. Under the current regime, although basic state pension accrual is limited to 30 years, additional state pension can be accrued over an entire working life (potentially up to 50 years). Under the new system it will be capped at 35 years with no additional state pension so there will be less scope to build up a more generous entitlement."

The silver lining only really applies to the self employed and those not in employment, who will generally be £2,000 a year better off under the new system.

Waites says anyone approaching their state pension age should contact the DWP, explaining: "Get in touch with the DWP to find out what you're likely to receive and avoid any unpleasant surprises." She adds: "The DWP has been a bit slow off the mark in bringing these issues to the public's attention. It's good to see Baroness Altman going on a crusade recently, and we hope it will provide individuals with much needed support to help them understand what pension they will ultimately receive from the State."

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