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The new pension system explained

In a few days’ time, the UK will have a new state pension system. Out go the complexities of the current arrangements to be replaced by a more generous flat-rate weekly payment for everyone.

Or at least that’s what you may have been led to believe.

What was promised

When the reforms were unveiled by the coalition government back in 2011, headlines promised payments worth more than £150 a week – substantially higher than the going rate of under £100 at the time – as well as fairer rules for women and others who had left the workforce to bring up families or care for older relatives.

What people are getting

Five years on, the picture is less rosy – and much less clear. Less than a fortnight before the new system comes into effect, MPs on the Work and Pensions Select Committee have published a report pointing out that, in the next few years at least, a large proportion of people will fail to qualify for the full weekly pension, which has been set at £155.65 for 2016-17.

The committee says that ministers have failed to warn the public sufficiently that there are a variety of reasons why those who reach state pension age on or after 6th April will get less money than they had expected. This could be because they have not built up sufficient years’ national insurance contributions, or because they have “contracted out” of Serps or the State Second Pension at some point in the past.

The Pensions Select Committee recommendations

The committee now wants the government to contact people individually to set out exactly how much state pension they are likely to be eligible for, as well as to explain what steps, if any, they can take to boost their entitlement. The MPs said that the Department of Work and Pensions was relying on “general awareness campaigns” to get across its message about the reforms, rather than making direct contact with those affected.

Changes for people on final-salary pension schemes

The bad news isn’t limited to those on the cusp of retirement. News reports this week point out that, because the State Second Pension (S2P) – which acts as a top-up to the basic pension – is being phased out, millions of workers face higher national insurance (NI) bills, with costs running to as much as £40 a month.

Until now, members of company final-salary pension schemes have been able to choose to pay lower rates of NI if they agree to a lower entitlement to S2P. But now the latter scheme is being scrapped, NI rates for around 6 million people are set to rise.

Removing complexity, but leaving confusion

Taken as a whole, the reform of the state pension system is welcome and will certainly remove much of the complexity that exists at present. But the changes were always planned to be cost neutral from the Treasury’s perspective, so it was inevitable that some people would lose out if others stood to gain. Sadly, this message appears to have been lost behind the news of a steep increase in the “full” rate of the weekly pension.