Pensions Q&A: Just what will the changes mean for you?

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Q What are the changes?

A One new state pension will replace the existing complicated system in which you can receive pension payouts including the basic state pension, S2P+SERPS, graduated pension and savings credit. The change should, in theory, make it easier to work out how much state pension you’ll get in retirement. That certainty, in turn, should help you to plan how much more you need to save to give you the lifestyle you want when you retire.

Q So it’s good news?

A In terms of sweeping away complexity, it is.

Q But will I get a higher state pension as a result?

A That depends. The change should benefit the self-employed and women, as all will become eligible for the new single-tier state pension from April 2017. Under present rules, for instance, self-employed people don’t qualify for the S2P, which means they end up with a lower state pension than employees. The new single-tier pension should mean the nation’s millions of self-employed people get a full state pension for the first time, according to the Government. It’s estimated that there are 4.2 million people who are self-employed who do not currently get a full state pension.

Women, meanwhile, currently lose out as they are effectively penalised if they take a career break to have children – as does anyone who takes time out to care for a relative. The Department of Work and Pensions says that around three million women currently receive a state pension worth less than £80 a week. Under the new proposals they will be able to qualify for the full pension as they will effectively get National Insurance credits for their career break years. The Government says around 750,000 women will receive an average of £9 a week extra.

Q So everyone will get the new state pension?

No. You’ll still need to have a qualifying number of years of National Insurance contributions. To get the full state pension – currently estimated at £144 – you’ll need to have paid in for 35 years. If you’ve paid in for less than that you’ll get a corresponding proportion of the amount. If you have less than 10 years’ NI contributions, you’ll get nothing. But that will only affect people who spend one or two years working in the UK, such as “Aussie backpackers”, according to Pensions Minister Steve Webb.

Q Who will lose out under the proposals?

A In the short-term those in a “contracted out” pensions scheme will be forced to pay higher National Insurance contributions. Under the present system public-sector workers such as teachers and nurses belong to pension schemes that are contracted out, which means they, and their employers, pay lower NI contributions and consequently get a smaller state pension. The new scheme will mean making higher NI contributions to qualify for the new flat-rate pension. Longer-term higher earners, who currently pay larger amounts in National Insurance, will be hit by the move to a single-tier pension as they won't qualify for a higher pension anymore.

Figures published by the Department of Work and Pensions in yesterday’s White Paper show that for those retiring in 2040, about 45 per cent will be worse off, 35 per cent better off and 20 per cent the same under the proposed new single-tier state pension.

Q When will the new scheme come into operation?

A It’s planned for 2017 at the earliest, which, frankly, is a little vague. But making the changes will be costly and will affect millions of firms and individuals so the government will want to get it right. That could lead to delays in its introduction.

Q Why are they making the changes now?

A In short it will save the government cash. If they don’t change the state pension system, the cost to the government of state pensions and pensioner benefits is expected to rise from 6.9 per cent of GDP in 2012/13 to 8.5 per cent of GDP by 2060/61. The single-tier pension reforms are expected to slow down the increases in state pension and pensioner benefit costs, bringing it to 8.1 per cent of GDP in 2060.

Case study: 'I worry for the generations  behind me'

Dr Miranda Hamilton, 51, a freelance consultant from Cambridge, said: “It seems to work for me because of my age and because I’m self-employed. However, I am concerned about the generations coming up behind me. It might not be as easy for them.”

Miranda has worked for 19 years and has had 10 years out of work. “I had five years out of the work place because of having twins and I couldn’t afford childcare for two children. I retrained in another career and worked for another 10 years. When I was a PhD student I put a tiny bit a month into my pension.”

She added: “I’m now self-employed. I’m earning more money, but I’ve had to increase my pension contributions to attempt to make up for the lost years. I didn’t continue NI payments when I had children, I wasn’t earning anything. In those lost 10 years I was doing little bits of part-time work, but not enough to contribute to a pension. It was enough to pay for school shoes.”

Miranda says pensions only become an issue when you reach your fifties. “I do have savings, but not significant savings that would sustain me in place of a pension. It’s a worrying thing.”