The new flat rate state pension comes into force next year, but the question is, will you be better off? According to research from Hymans Robertson, a worrying number of people won't be.
The figures show that less than half of those reaching State Pensions Age (SPA) shortly after 2016 will earn the full single tier pension of £155 per week, meaning that most people will lose out. Over the long term, their shortfall will quickly escalate, with calculations showing that some people could be up to £20,000 worse off over the course of their retirement.
The majority of those who will lose out under the new system are lower earners who have been contracted out, but conversely, the winners of the new system will be the long term self-employed and those not in employment, who could be around £2,000 per year better off.
It's a complicated process as much of it comes down to the amount of National Insurance Contributions paid and whether workers have got the chance to build up more state pension, but while the new system has been touted as a fairer one that could benefit the majority, it may not be that simple.
"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," said Sue Waites, partner at Hymans Robertson.
"The transition to the new state pension brings many complications, particularly for those approaching State Pension Age (SPA). Some will be very surprised at how much they actually get, [and] working out who the winners and losers are is horrendously complicated."
Unfortunately, over the long term, Waites says that the majority will lose. This is because under the current system, although basic state pension accrual is limited to 30 years, additional state pension can be accrued over an entire working life. However, under the new regime it'll be capped at 35 years, so there'll be less scope to build a more generous entitlement.
"The only people who won't lose over the long term are those who don't accrue additional state pension at the moment," explained Waites. "Typically these are the self-employed or those not in employment who are not entitled to credits towards additional state pension. Generally they will receive a higher state pension from the new system [and will] effectively be £2,000 per annum better off as currently they'll only be accruing basic state pension.
"However, the biggest issues lie with those approaching retirement. The picture is far from clear; these individuals should get in touch with the DWP to find out what they're likely to receive and avoid unpleasant surprises," concluded Waites.
So, if you're worried about what the future holds for your pension, the key is to get advice as soon as possible. There may be things you can do to boost your pot, or you may like to concentrate on building a personal pension instead, but whatever you do, don't stick your head in the sand! Start taking action and hopefully you won't lose out when the new system comes into force – and at the very least, you won't get a nasty surprise when it launches.
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