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State pension reforms: what will I receive?
Are you confused by how the government's plans for a £144-a-week state pension may affect you? Read our guide.
by Michelle McGagh on Feb 04, 2013 at 11:46
The introduction of a £144-a-week, flat-rate state pension in 2017 has left some people confused about just what they will receive and wondering whether they will be short-changed in retirement.
Under the government's plans anyone who contributes national insurance contributions (NICs) for 35 years will receive the full amount of £144-a-week. This is an increase from the current £142.70 basic level of means-tested pension available for a single pensioner.
If you contribute less than 35 years of NICs you will receive less than £144-a-week as a basic payment.
There will also be a minimum qualifying period of between seven and 10 years to receive anything from the state.
What will I get?
The introduction of a £144-a-week state pension isn’t as straightforward as it sounds because there are many people who have already paid in enough contributions and also built up extra state pension provision.
To work out how much you are due, you first need to work out your ‘foundation amount’. This is a new term that has been brought in by the flat-rate pension reforms. It is the amount of state pension entitlement you have already built up. It will tell you how much more you need to contribute in order to receive the £144-a-week state pension in retirement.
To work out your foundation amount you need to work out how much basic state pension you are due by entering your details into the government’s State Pension calculator.
The calculator asks how many years you have contributed NICs since you were 19-years-old, whether you have claimed unemployment, sickness or disability allowances, or if you have claimed child benefits or fostered any children.
The calculator will then tell you what your basic state pension will be and what your retirement age will be. At the moment mine is £46.56-a-week and I won't retire until 2050 aged 68.
Unfortunately, the calculator cannot tell you how much additional state pension, or state second pension (S2P), you may be entitled to. To find out this you will need to ask for a full State Pension Forecast Statement. Any entitlement to S2P will boost your foundation amount.
The situation with S2P and additional state pension is a bit complicated because of the system by which people could 'contract out' of S2P (see more below) and divert some of their NICs into their own personal pension plan. People who contracted out don't get the S2P and therefore can't add it into their foundation amount. However, 35 years of NIC contributions will ensure they get the £144 a week.
Once you have worked out the foundation amount you will then fall into one of four categories, according to the Department for Work and Pensions (DWP).
Note, that these categories apply to those retiring after the new rules come into play, which will be 2017 at the earliest. Those who retire before the new state pension is introduced will have their pension calculated under the current system.
Your foundation amount is equal to the new state pension amount of £144-a-week.
Those whose foundation amount is equal to £144-a-week are likely to have the full 35 qualifying years and have not been contracted out of the state second pension (S2P).
The DWP gives the example of Liz who is 57 and has run her own business for the past 36 years.
She has never been contracted out of the S2P, which means she does not have any reductions in the additional state pension.
As Liz’s foundation amount is already £144 she will not be able to add extra pension by gaining more working years.
Your foundation amount is less than £144-a-week
Those whose foundation amount is less than the new flat-rate pension are likely to be younger and not built up 35 qualifying years yet, or older people who have been contracted out of the S2P so have not built up the full amount of entitlement despite working for many years.
The DWP uses the example of Matt, aged 32, who has been contracted out of the S2P. His foundation amount is just £49-a-week.
Matt can use the years he has left in work to build up his state pension entitlement to the £144-a-week level. For every year he works he will add £4.11 to his state pension entitlement until he reaches the £144-a-week threshold. He would need to work for another 24 years to reach the threshold.
Your foundation amount is more than £144-a-week.
Those whose foundation amount is more than the flat-rate pension are likely to be older and have never spent any significant amounts of time contracted out, meaning they have always paid into the S2P.
The DWP uses the example of Jenny, aged 60, who has worked as a receptionist for 32 years and has never been contracted out of the S2P.
As Jenny has worked for a long time and never contracted out she has built up a pension entitlement, under the current rules, of £147-a-week, Under the new pension Jenny will receive £147-a-week made up of £144-a-week state pension plus the £3-a-week ‘protected payment’ that she has already accrued.
Like everone else Jenny will not, however, be entitled to any extra pension for any years she worked after the 35 qualifying years.
Your foundation amount is zero.
Those who have not yet started work will have no NICs to make up their foundation amount.
The DWP uses the example of Tim who is 15 and at secondary school. When Tim starts working he will receive £4.11 in state pension for every qualifying year he works, up to 35 years.
Contracting out or losing out?
The most confusing aspect to the state pension changes is around contracting out. Those who contracted out opted to have some of the NICs deferred into their company or personal pension rather than build up extra state pension entitlement through the S2P.
If you have not been contracted out and instead paid into the S2P and built up entitlement then you won’t lose it but it will not be paid as an extra amount.
Take for example, Citywire Money reader Gatser. Gatser’s pension forecast is a basic state pension of £107-a-week plus £11-a-week from S2P, a total of £118-a-week.
Gatser will be eligible for the state pension in 2024 and will have 35 years plus of qualifying NICs by then.
Gatser wants to know if he will get the £144 a week from the new state pension plus £11 a week from S2P?
The answer is no, as Andy Zanelli, head of retirement planning at AXA Wealth, explained. He said Gatser‘s S2P contribution would now only count towards his or her foundation amount and would not be paid on top of the new £144-a-week rate.
‘At the implementation date each individual entitlement will be valued using the new rules. If previously contracted out a deduction will be made reflecting that they have paid lower NICs [so a lower state pension will be paid],’ he said.
‘A check will then be made to see if the current system would give a better outcome. The higher valuation will then become that individual’s foundation amount. For those individuals whose foundation amount is less than the level of the single-tier pension [£144-a-week], they will be able to increase this foundation amount up to the level of the full single-tier pension…at the rate of £4.11 for each additional qualifying year they gain before reaching their state pension age.’
In Gatser’s case the extra £11-a-week will be added to the basic level of £107, meaning Gatser has a foundation amount of £118-a-week.
Zanelli said: ‘In [Gatser’s] case the client will build on their foundation amount until it reaches the full single-tier rate.
This also applies to the example of another Citywire Money reader Jordan.
Jordan has a state retirement date of 2036 and has 19 qualifying years towards the state pension. Jordan was contracted out over the past two years but before that was contracted in for 17 years and has built up a £30-a-week state pension entitlement from the S2P.
Jordan wants to know, firstly, if the £30-a-week is lost under the new rules and is £144-a-week the maximum that can be received.
Secondly, what happens if the full 35 years NICs aren’t paid? Jordan said: ‘What happens if I don’t make 35 years NIC contributions (say I emigrate)? If my contribution years only entitle me to say £144-a-week state pension, will the £30-a-week S2P I accrued be recognised as it doesn’t exceed the £144-a-week cap?’
Zanelli said: ‘Jordan will be in the same position as Gatser with regard to the foundation amount calculation.’
This means Jordan’s S2P contributions would be added to the basic state pension already accrued to determine the foundation amount. On the question of emigration, Zanelli said Jordan would only receive the foundation amount in retirement plus any additional entitlement accrued by paying in.
‘I believe this amount plus any additional years gained after the implementation date would be payable at the time the individual reaches their state pension age, irrespective of residency,’ he said.
More about this:
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by Michelle McGagh on Jul 25, 2016 at 13:50