State pension changes explained by investment advisor
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The old basic State Pension is paid to men born before April 6, 1951, and women born before April 6, 1953. It gives them notably less than the new single-tier State Pension, paid to those born after those dates, leaving older pensioners feeling cheated.
From April 6, the new State Pension will pay up to £185.15 a week to those who qualify for the full amount, a rise of just 3.1 percent after Chancellor Rishi Sunak suspended the triple lock.
That’s the headline figure many journalists use when writing articles.
Yet old basic State Pension will pay a maximum of just £141.85. That’s £43.30 a week less, which works out at £2,251.60 less over a year.
Many Express.co.uk readers feel aggrieved that they are receiving less, and have contacted us to say how unfair this is.
Many are frustrated that people talk as if every pensioner was getting new State Pension, which pays up to £9,627.80 a year, when they are getting £7,376.20 at most, and in many cases less.
One reader, Lauraine, wrote: “Myself and many other pre-1951 born people are baffled as to why it is assumed we can live on less.”
She added: “I get very annoyed when I hear and read in the media that the State Pension going to be £185.50, when for most pensioners that isn’t the case”.
Another reader, SG, noted that the vast majority of retirees do not qualify for the new State Pension and lose out as a result. “This is discrimination. Even if you are one day out you can be short by more than £43 a week”.
So why does the old State Pension pay a lower maximum amount and do older pensioners have a right to feel aggrieved?
The situation is more complicated than it first seems, as there are winners and losers in both systems, according to Canada Life’s technical director Andrew Tully. “Some get less than the headline rates on both pensions, while others get more.”
Under both the old and new State Pensions, retirees get an additional earnings-related amount through the additional State Pension, also known as Serps or S2P.
Tully said some workers on the old, apparently lower, State Pension contracted-out of the additional State Pension and paid lower National Insurance (NI) contributions as a result. “They get less additional State Pension but should hopefully get a higher private pension to compensate.”
The average amount that pensioners get in practice is similar for both pensions. Currently, men get £170.50 a week under the new State Pension, and £172.64 under the old one.
The new State Pension has closed the gender pension gap, as it pays women £164.74 a week on average, up from £145.87 for women who retired under the old regime. So older women do have a right to feel frustrated.
That’s because the old State Pension was earnings related, whereas the new one is based on how many years of qualifying NI contributions people make, topped up by NI credits if women took time off to raise children.
Another difference is that you need 35 years of qualifying NI contributions to get the maximum new State Pension, but can qualify for the maximum old one with just 30 years.
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Few will be surprised to discover the new single-tier was introduced to save money, by cutting overall state spending on pensioner benefits. Ending contracting out also cut the NI bill, Tully said.
While the two systems are fairer than they first appear, some individuals can get badly caught out, and receive much less pension as a result
The new State Pension is designed to make thing simpler, and give a clearer idea of what people can expect when they stop working to encourage them to save more themselves, said Stephen Lowe, group communications director at retirement specialists Just Group.
Lowe said it always pays to get a State Pension forecast from government portal Gov.uk and plug any gaps in your NI record, while building retirement savings in your own name.
“Do some research, take advice or seek professional help to understand the options and make good choices. The government-backed, free, independent and impartial service Pension Wise is a great place to start.”
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