Flat rate pensions: what the changes mean for you
The government has announced changes to the state pension that could have a dramatic impact on millions of women retiring from 6th April 2016. Here, we explain what the flat rate pension is and how your finances might be affected.
What is happening to the state pension?
Current complicated pension regulations mean it's virtually impossible to work out exactly what you will end up with when you stop work, so the government has proposed introducing a simple flat-rate pension.
With effect from April 2016, the current basic state pension and second state pension (S2P, formerly known as the State Earnings Related Pension Scheme or SERPS) will replaced by a single scheme.
Pensioners will receive a flat-rate state pension, worth £144 a week plus any inflation rises between now and 2016. This is likely to be around £155 to £162 a week in 2016.
Under current rules, the full state pension is £107.45 a week. This can be increased to £142.70 for those who are eligible for the pension credit, and can be further boosted by the second state pension.
According to research by Prudential, a 65 year old today would need a £130,000 private pension fund to generate the same £144 a week assuming they secured the highest possible single life annuity - or income for life - without a guarantee.
But the number of qualifying years of National Insurance contributions (NICs) you'll need to have to get the full state pension will go up from 30 to 35 years, and a minimum qualification period of 10 years will be reintroduced, so anyone who has not paid National Insurance for at least 10 years will not get a state pension.
Under current rules, even if you've only made contributions for a year, you will still get some pension.
Who will benefit from the flat-rate pension?
Women should be among the winners, as under the current state pension system they lose out if they take a career break to have children. Under the new proposals, women will be able to qualify for the full pension as they will get National Insurance credits for their career break years.
According to the government, around 750,000 women who reach pension age in the 10 years after the changes are introduced will get on average an extra £9 a week.
People who are self-employed will also benefit, as under existing rules it is almost impossible for self-employed workers to earn a full state pension.
For example, currently they can only receive a maximum state pension of £107.45 a week, but from April 2016, people who are self-employed will be entitled to the same flat-rate pension as employees.
Couples should also benefit from the changes, as they will now each qualify for the full flat-rate pension as individuals, rather than receive the current less generous joint couple's rate.
What if I am due to retire before April 2016?
Anyone retiring before the reforms are implemented in 2016 won't be affected by the proposals and will receive their pension under the existing scheme.
What if I belong to a final salary scheme?
Many final salary pension schemes are contracted out, which means employees have paid lower NICs as their scheme guarantees to pay an equivalent to the second tier pension.
Contracting out for private pensions and Defined Contribution schemes stopped in April 2012, and final salary scheme member schemes will no longer be able to contract out April 2016.
As a result, members of contracted out final salary schemes will have to pay an extra 1.4% of salary in NICs. While this means they will get a higher state pension, they're unlikely to get the full flat rate because of the years in which they did not make full NICs.
And some financial commentators are predicting that many final salary schemes will now close because of the increased costs both employers and employees will face.
What age will I get my pension?
Under changes already announced, women will retire at 65 by 2018. The state pension age for men and women will then rise to 66 between 2018 and 2020, increasing to 67 by 2026. The government will carry out a review of the state pension age every five years.
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