Overhauled state pension aims to give certainty on retirement income
The state pension has undergone a radical overhaul, as a new "simplified" system now aims to give people more certainty about the retirement income they are likely to end up with.
The new system will have "winners" as well as "losers". While in the long run it aims to be easier to understand by sweeping away complex rules, concerns have been raised that some people could be in for a "nasty surprise" as the scheme beds in.
The state pension will change for people who reach pension age on or after Wednesday. To get the new state pension, men must have been born on or after April 6 1951 and women must have been born on or after April 6 1953.
The previous system has been made up of two parts - the basic state pension as well as the additional state pension, which is extra money on top of the basic state pension.
The full new state pension has a single-tier rate, of £155.65 a week. Usually people will need at least 10 years of qualifying National Insurance (NI) contributions to get any state pension - and 35 years of contributions to get the full amount. Contributions could come from paying in or getting credits, for instance for caring for a family.
Chancellor George Osborne said: "Today's reform of the state pension is the most significant since its inception. The new system means that at last, people will have certainty in what they can expect from the state in old age - and for many women and the self-employed, it will be more generous.
"People will know that the full amount when they reach state pension age will be over £8,000 a year in today's money, so they can plan other retirement saving they may want on top."
Analysis from the Institute for Fiscal Studies (IFS) found that fewer than one in five people reaching state pension age over the next four years will get this exact amount of £155.65. It said nearly one in four retirees will get more - but most will get less.
On the upside, the new state pension promises to be more generous to many people who have been self-employed or have taken time out of work to care for family members.
The Government said more than 75% of women and over 70% of men will gain in the first 15 years of the new state pension, and by 2030 over three million women stand to gain an average of £550 extra per year as a result of the changes.
But the IFS said of the new £155.65-a-week state pension: "Our analysis suggests that only 17% of those reaching the state pension age over the next four years will receive a state pension worth exactly the single-tier amount, while 23% will enjoy a higher income and 61% will receive a lower state pension income."
Explaining the reasons for the differences in entitlements, the IFS said some people have already built up an entitlement to more than the full rate under the old pension arrangements and they will see their entitlement protected.
Meanwhile, many people receiving a pension below the full amount will have had periods when they have been "contracted out" of the additional state pension - meaning they paid reduced rates of NI contributions in exchange for reduced pension entitlement. Eight in 10 of those reaching the state pension age over the next four years will have been contracted out at some point during their lives, the IFS said.
It said: "It might come as a nasty surprise to many that their state pension income is in fact less than the full 'flat rate' amount of £155.65 per week."
According to Age UK, a round 70,000 people in their fifties and sixties will miss out entirely on the new state pension between now and 2030.
Some 50,000 women and 20,000 men do not have the minimum number of qualifying years of NI contributions, according to the charity's analysis. The previous regime allowed people to receive at least some state pension even with only a few years of NI contributions.
The Government's own analysis has also found that the benefits of the new state pension will diminish for future generations.
Recent research from the Department for Work and Pensions (DWP) found that while the majority of those retiring in the next 15 years are expected to gain over the course of their retirement, the proportions of those doing so are expected to reduce after 2030.
The projections showed that in 2050, just over 30% of people reaching state pension age in that year will be better off under the new system over the course of their retirement than under the previous system - while nearly 70% will be worse off.
Work and Pensions Secretary Stephen Crabb said: "This ambitious new reform will transform the state pension for future generations. Millions stand to gain from the simpler system, including women and the self-employed, who so often lost out in the past.
"Combined with solid private pensions savings which are being expanded through automatic enrolment, it will help ensure that people have much-needed financial security in their later years."