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Changes to the State pension – how could it affect you?

The reform of the State pension system due to take effect next April was widely welcomed when it was announced by the coalition government in 2011.

It was thought that, under the new flat-rate scheme, much of the complexity of the current arrangements would be phased out and most retired people would get a more generous weekly payment.

Not what everyone expected

It is true that the confusing State Second Pension (previously known as Serps), under which extra National Insurance contributions can generate extra State pension, will soon be a thing of the past. So will widespread means-testing of those on lower incomes to check eligibility for Pension Credit top-ups. But as more and more people are finding out, they may not be entitled to as much of the new pension as they had hoped.

The government will reveal this week what the “full” weekly payment under the new system will be – it is expected to be just over £150. (By way of contrast, payments made to pensioners who have retired under the current system will rise from today’s £115.95 to £119.30 next spring, ministers have just announced.)

Restrictions to entitlement

For those whose State pension age falls on or after April 6 2016, however, entitlement to the full £150 a week could be reduced by a number of factors. For example, if they have spent any parts of their working lives “contracted out” of the State pension system – with National Insurance payments diverted into their own company or personal pensions – they could receive much less.

Meanwhile, certain people who paid into their employers’ final-salary pensions in the 1980s and 1990s might also lose some of their State pension’s annual inflation-linked increases.

The government has only in the last few months revealed exactly how heavily people will be penalised in such circumstances, and many of those due to retire soon after the reforms come into effect have been unpleasantly surprised to learn they will get considerably less State pension than they had expected.

Find out how much you will get

If you are over 55, you can contact the government to get a State pension statement, which should explain how much weekly pension you are likely to be entitled to. It may be possible to top-up your potential payments by making extra National Insurance contributions, for example.

Anyone under 55 can try out this online calculator to get a pension forecast.

Just missing out

The new system has also generated strong feeling among many people who will just miss out on the flat-rate pension. Thousands of women born between April 1951 and April 1953 believe they have been treated particularly unfairly: this is because they have been forced to wait for their State pension by changes in legislation, and also because they will not benefit from the new scheme.

This group was originally due to qualify for the State pension at the age of 60, but many have had to wait until 62 as part of the government’s programme to equalise men’s and women’s State pension ages, meaning a large number of women will missing out on the new – potentially more generous – pension by a matter of weeks, while men of the same age will be eligible for it. Minsters say there is nothing they can do to put matters right.

Transitional issues

Reform of the State pension was clearly overdue, and in theory the new scheme should be fairer and easier to understand. But these transitional issues are taking much of the gloss off what should be a positive change.

To find out how you’ll fare, use the online State pension calculator.