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The new state pension

How much do you know about the new state pension?

In less than 15 months’ time the UK state pension system will undergo its most radical overhaul in decades. Unless you have reached the moving target that is State Pension Age by 5 April 2016, your existing entitlements to various benefits will disappear on 6 April 2016. These are:

  • The basic state pension;
  • Graduated pension (which ran from 1961 to 1975);
  • State earnings related pension scheme (SERPS); and
  • State second pension (S2P)

In their place you will become entitled to a ‘Foundation Amount’ under the new single tier pension. The calculation of the Foundation Amount is complicated. It could amount to more than the state pension benefits you have earned up to the end of 2015/16, but it can never amount to less than these entitlements.

Late last year the Department for Work and Pensions (DWP) launched a “new multi-channel advertising campaign” aimed at explaining the new system. The need to increase people’s awareness of the new system was made clear in some research the DWP published alongside the press release announcing the campaign. Only 22% of those questioned agreed with the statement that “I know how the changes to the State Pension will affect me, if at all”.

When asked whether anyone already getting a State Pension would see the amount change as a result of the new State Pension reform, 44% (wrongly) believed there would be a revision. Of those aged 65 and over, 37% said their pension would change. The pollsters did not ask the obvious corollary – what will the change be?

One problem for the DWP is that much of the media coverage of the new single tier scheme has talked of the pension being “around £150 a week” – a phrase even the DWP used in its press release. However, that figure is the full rate of the new single tier pension and if you have ever been contracted out of the additional state pension (SERPS and/or S2P) you may well receive less.

The DWP is urging everyone – and the over-55s in particular – to request a detailed State Pension statement so that they “can plan accurately for retirement.”  It is advice we would thoroughly endorse. The new scheme sounds like a bigger state pension, but in the long term the new pensioner benefits will cost the government less than today’s pension combination would have, so any winners created will be more than matched by losers.