5.1.3 The new flat-rate state pension

From April 2016, for those new to attaining the state pension age (SPA) the state basic and additional pensions have been replaced by a single flat-rate pension (for 2023/24 of £203.85 per week).

For 2023/24, the UK government’s assessment of the minimum weekly income required by pensioners was £201.05 for a single person and £306.85 for a couple (whether married or not) (Age UK, 2023).

This contrasts with the situation in the mid-1980s, when the basic state pension was about the same as the minimum level of income that was deemed enough for a single householder to live on. Therefore, anyone relying solely on the basic state pension is now also eligible to claim a means-tested top-up.

Such means-tested retirement benefits can discourage saving for retirement because building up a small private pension simply reduces the amount of benefits that can be claimed. The change to a flat-rate pension from April 2016 was intended to ensure that the state pension no longer falls short of the minimum income required. As a result, far fewer pensioners will need to claim means-tested benefits and there will be no disincentive to saving for retirement.

The rules relating to UK state pensions, the new flat-rate state pension and the impact on both of our record of National Insurance Contributions (NICs) are quite complex. To help you through the maze, watch this video, in which Martin and his Open University colleague, Jonquil Lowe, talk about UK state pensions and the 2016 changes.

The video was filmed in 2015. However, the issues explored remain relevant to retirement planning.

Download this video clip.Video player: ou_futurelearn_mmi_vid_1187_2.mp4

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Transcript

Martin Upton

Now, there are a huge number of complicated changes which are currently going through about UK state pensions; some of which are causing concerns. So let's just see now if we can work our way through the state pension maze and bring some clarity to the situation.

So, let's just ask you a basic question, first of all. It's been asked by people like Laura Ryan, Helen Hemington, Jeanette Dandy. Basically, the question is, what do I need to do to generate my state pension? You don't just get it, automatically, do you?

Jonquil Lowe

No, you have to build up a record of national insurance contributions, now, usually, you pay those while you're working, but there are lots of situations in which you might be credited with contributions instead, so that includes periods when you're off work sick, or you're in a very low income, or you have caring responsibilities. In those situations you're still building up your national insurance record. As you say, we're in transition so at the moment we're under an old system but from April 2016, so not this April but April next year, we move to a new flat rate pension, and you'll need 35 years' worth of contributions to get the full, flat rate pension.

Martin Upton

Ok, so it's all about your contributions record. So, if hearing what you say people want to find out, immediately what their contributions record is like, what it amounts to, where can they find that information?

Jonquil Lowe

If you go to the gov.uk website hunt for state pension statement. You'll get to an online service, or you can download a form to send in, and you'll get a statement of how much pension you've built up, so far.

Martin Upton

OK, some further questions around national insurance contributions. One specifically has come in from Elaine Ellis. If you've been a stay-at-home mum how does this affect the buildup of those contributions and, therefore, your entitlement to state pension?

Jonquil Lowe

This comes back to the national insurance credits that we talked about. At present, if you're a stay at home mum as long as your child is under 12, and you're getting child benefit, then you're getting national insurance credits that are protecting your record for state pension purposes.

Martin Upton

What if I'm on a really low income and I don't pay national insurance? Surely, I'm not contributing to my national insurance contribution record to generate my state pension. That question is coming from a number of learners.

Jonquil Lowe

There's a level at which you start paying national insurance contributions but you still count as clocking-up, your record, as long as you're earning at least £111 a week, at the moment. If you're beneath that, you're not building up a state pension unless you're getting credits for another reason. Now, one reason could be if you're claiming working tax credit, or universal credit, then, you will be getting national insurance credits to protect your state pension. No simple answer, there, you have to check your own situation.

Martin Upton

Ok, so, you're building up your entitlement to state pension, through your national insurance record. I've got that completely clear, but, some people, in addition to their plans to get state pension, are in an occupational pension scheme and some of those occupational pension schemes are what's called contracted out schemes, which means they're not paying in as an employer, so much national insurance than if you're not contracted out. That means, possibly, without your knowing it, your state pension is being eroded; undermined a little bit, because not so much national insurance is being paid in by your employer to build up your entitlement to your pension. It's a complicated area. Have I got that right?

Jonquil Lowe

It's complicated, I mean, you've got the rules right, but I don't really agree with your interpretation of it. I'll tell you how I see it; maybe we'll disagree. We talked about your national insurance record for your basic state pension and the fact the pension system is changing from next year, but at the moment we're under the old system. Set the basic pension aside. In addition, what you may be doing is building up a state additional pension and that's really if you're paying national insurance contributions on anything above the £111 week, then you're building up some additional pension, if you're an employee. If you're contracted out, it's really a way of the government outsourcing your state pension. So, if you're contracted out, both you and your employer are paying less national insurance, but that national insurance is going into your employer's pension scheme in order to provide you with pension instead of the pension you would have had from the state. It's diverting your national insurance to another place. You're not exactly being diddled out of your state pension you're getting an employer's pension, instead.

Martin Upton

I think you're fair I mean, you're not being diddled out of it. I think the issue is that a lot of people didn't realise it worked like that. I think a lot of people when they heard about the flat rate pension thought well, flat rate everybody gets it, at the same rate. It's not as simple as that, is it?

Jonquil Lowe

No, it's not. At the moment; under the current system that we have, when you get to retirement, your whole pension is worked out as if you had always been in the state additional pension and then, a lump is knocked off to take into account that some of it is coming from an employer's scheme, instead. Exactly the same rule applies with the flat rate pensions. When a flat rate pension is worked out, a lump is knocked off because some of your state pension is coming from your employer's scheme and that means that you may be getting less than the full flat rate. If you're still in work then you can build up, you'll be paying national insurance contributions, so you can build up more flat rate pension.

Martin Upton

So, carry on working, basically.

Jonquil Lowe

Yes, but it depends on your age. You may be carrying on working, anyway.

Martin Upton

Yes, and building back up to those 35 years. So the gold standard is 35 years of contributions?

Jonquil Lowe

That's right, for the full, flat rate, absolutely.

Martin Upton

Ok. Now, I have one specific question which I've got to ask about the changes. It's quite important and it has been posed by a number of people. One of those people, John Roberts, Sr. posed a question and it relates to something we say in Step 7.4, Managing my money. We talk about the end from 2016 of the current arrangements where a basic pension is paid to wives, even if their record doesn't justify payment of that pension, but the national insurance record of their spouse does. We say in that step that finishes in 2016. I just think we need to clarify that, don't we, because for the people who are already getting that, it doesn't stop, does it?

Jonquil Lowe

No, it doesn't. As I say, we've got the old state scheme until 05 April 2016. The new state scheme starts 06 April 2016. If you reach state pension age under the old system, then the old system rules continue to apply to you.

Martin Upton

The statement stops in 2016, for people who are getting to state pension age from 06 April 2016. I hope that has clarified that important point of detail. Thinking again about national insurance records, if I was working overseas could I carry on paying national insurance? What happens to my entitlement to state pension in the UK?

Jonquil Lowe

It's a complicated area. If you go to work overseas for two years or less, you might carry on paying national insurance in the UK, in which case, no change. Otherwise, when you go abroad you stop paying national insurance, here, which means you stop building up state pension, here. However, there are agreements between all the countries of the European Economic Area, so that's the EU, and with a few other countries, which means that instead, you build up an equivalent pension in that country. So, when you reach retirement, you'll get an equivalent of the whole pension but you'll get some from the UK authority and some from the authorities abroad. If you go to some other countries, it may be a different picture. You may be losing out on UK state pension and not necessarily getting any replacement pension in that other country. Go to gov.uk, the government site, and search for International pension centre and they can give you the information you need, for where you're going.

Martin Upton

Kathy Burns has asked, from looking at the national insurance record that she's got, can you top up with lump sums, your entitlement to state pension? I think you can, and I think it's quite efficient, isn't it?

Jonquil Lowe

Yes, yes it is. Again, we're talking old system/new system. So, if you're under the old system, the current system, and you reach state pension age before 06 April 2016, then from October of this year, you'll be able to pay some lump sum national insurance contributions, special ones called class 3A. You'll pay a lump sum and it will buy you extra state pension. You buy the extra state pension in chunks of £1 per week. The lump sum you pay varies with age and it actually looks like a very good deal. For 65 year olds, I think it's around about £900 lump sum for £1 a week state pension for the rest of your life and that's index linked, which is about half of what you would pay for the equivalent annuity.

Martin Upton

They're good deals. I think people in those circumstances should be looking at it, closely. I learned from my brother, last night, actually, that's exactly what he's done, and he did it without my guidance. Perhaps, he didn't trust me to give guidance, but anyway, he went ahead and did it and I said, Yeh, that looks like a good deal, because I've learned about that from Jonquil. A couple more question areas about the state pension. Amanda Finn has asked, will having an occupational pension affect your entitlement to state pension? Christine McDowell, Carol Millborough, Christine Ridgeway and Susan Knight have asked does being self-employed affects your entitlement to state pension. Surely, the answer is no, because it's all down to your national insurance record. Being in an occupational pension doesn't bar you from having a state pension; being self-employed or having your own pension arrangements doesn't bar you from having a state pension; it's down to your national insurance record. In a nutshell, is that right?

Jonquil Lowe

In a nutshell that's right for the new system, the flat rate system. At the moment, under the current system, we've already talked about contracting out, so, it could be that your state pension is a bit lower because you're getting that contracted out pension, as well. If you're selfemployed, then the additional pension does not apply, to you. You can only build up the basic pension.

Martin Upton

Final question area which has come up from Peter Birkbeck and Cowan Jennings on the subject of these changes to state pension which we've seen unfold in recent years, in particular, the pushing outwards into the distance of the state pension age; particularly, for women. I had and if not heated, then a lukewarm discussion with my wife, about this, the other day, who was saying all these changes are completely unfair. I mean, we used to get our state pension at sixty, and now that just sort of disappearing over the horizon. I suppose the question is, how fair are these changes, to women? Do you think there is bias, that men have lost out a little bit, with the pushing out of the pension age, but women have lost out big time? It seems to me, there's some merit in arguing that.

Jonquil Lowe

Yes. I think always the problem with fairness arguments is that it's easy to define fairness in many different ways. What seems fair to one person may seem unfair to another person. Women, traditionally, had a retirement age five years younger than their husbands, but, that was based on a system where women didn't work and were expected to rely on their husbands to support them which is pretty old fashioned, these days. Women, statistically live longer than men so, in a way you might argue perhaps it would be fairer if they retired later rather than earlier so they had the same number of years, in retirement. What the government is doing with the raising of the state pension age; what's underpinning that, is they think it's fair that people should spend no more than 1/3 of their adult years, in retirement, and so, as people live longer, the retirement age goes up, but each generation still has the same proportion of their life in retirement. Well, that's one way of arguing fairness. It's not going to be the way everybody sees it. Certainly, if you're caught on one side of a change, it can seem very unfair that someone born, just a month later, is treated differently. Change, unfortunately, always creates some anomalies, like that. What I would say is, think back to when state pensions were, well, don't think back because you weren't born.

[LAUGHTER]

Martin Upton

I can't that's 1908, wasn't it?

Jonquil Lowe

It was but the state pension age, then, was seventy. It was a very cheap system because most people died before they ever reached seventy.

Martin Upton

Yes, I know, I know, no life expectancy, at that point.

Jonquil Lowe

So actually 1/3 of adult life in retirement looks very generous, historically, even if we are seeing the state pension age rise.

End transcript

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