Only a third of people will get the full flat rate pension: will you?

If you contracted out of SERPs, even for a couple of years, you could pay a huge price

close up portrait of a senior...

A study by Money Mail has calculated that in the first year of operation of the new flat rate state pension - which starts in April 2016 - just 222,000 of the 600,000 people hitting state pension age will qualify for the full pension. This includes 30,000 people who had thought they would be entitled to £151.25 a week, and will be shocked to discover the reality.

The difference comes from a gap between estimates released in June last year and new figures that show only 37% of people will be able to claim the full amount in the first year.

Why payments are reduced

A huge number of those affected are women who took a career break to deal with caring responsibilities, and as a result do not have the full 35 years of National Insurance contributions they need in order to qualify. The good news for them is that they can apply for credits to reflect some of the years they were caring for family members. They are also able to buy additional years of contributions - assuming they can afford it at such late notice.

Another group facing a nasty shock are those who at some point in their life opted out of the state second pension - in return for lower National Insurance contributions into a company pension or contributions into a personal pension. This was known as contracting out. The government has reasoned that because you are likely to have a pension elsewhere as a result of the time spent contracting out, you should get less from the state.
Is this fair?

In some instances, people contracted out as part of opting into a final salary pension, so they should have enough pension income from this pension to help them cope with smaller payments from the state. However, there are plenty of people who contracted out and built up paltry sums in personal pensions instead. Some of these pensions will earn them little more than a couple of hundred pounds a year, and in return they will lose a substantial chunk of their state pension.

To make matters even less fair, the government is not allowing people to work longer in order to make up for lower National Insurance payments as a result of contracting out - or buy any additional years.

Instead the government will work out what you could theoretically have made from the lower NI payments or sums paid into a personal pension, and the income you could theoretically get from it. They will then subtract this from the full state pension. There are concerns that the assumptions used in this calculation could be way off. In particular, it assumes that anyone who ever contracted out did so for their entire career. It means the system seriously hurts people who contracted out only briefly.

Over time, the percentage of people who qualify for the full state pension will rise, so that a few years in almost half of pensioners will qualify. However, there will still be those paying a huge price for a decision they cannot have known would hurt them in this way.

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