Pension funds do not want volatile investments

Listen to this article

00:00
00:00

Big changes to the state pension coming into force next year promise to deliver a “fairer” deal for women who have typically come off second best to men at retirement.

But new figures show that of the 400,000 expected to claim the new state pension next year, only 20,000 women will get the full “flat rate” of about £155 per week.

Why are so few women getting the full rate compared with men?

The previous coalition government said its new single-tier pension would help deal with gender inequality in the system, which has brought poorer state pension outcomes for low earners and those who have taken time off work to care for others. In the main, these are women.

However, only 80,000 women will receive the new flat-rate state pension from 2016 to 2018, compared with 390,000 men, figures released by the Department for Work and Pensions show.

The government says this is partly because fewer women will actually reach state pension age over those years. This is due to separate changes to the women’s state pension age, which is rising from near 63 now to 65 by 2018.

In spite of the unequal start, officials say that from 2022 as many women will get the full rate as men.

Other factors may also help explain the current imbalance. First, many women (and men) will find that they will not receive the full rate because at some point in their working lives they were “contracted out”.

This means that instead of paying national insurance contributions to build up additional pension from the state, the government allowed “contracted out” workers to pay a reduced rate of NI in return for building their future pension with a workplace scheme.

To account for periods when lower NI was paid, the government will make a deduction from the new state pension.

Many women may also struggle to meet eligibility criteria for the new state pension.

Currently, 30 qualifying years of national insurance contributions or credits are needed to qualify for the full basic state pension, of £115.95 per week. But this is rising to 35 years under the new system, with anyone showing less than 10 years on their NI record not getting any pension.

How does the government defend this?

In general, the new state pension is “much fairer for women”, the government says. Thanks to its reforms, about 650,000 women reaching state pension age during the first ten years of the new scheme will receive a state pension that is, on average, £8 a week higher, it argues.

However, this number has been revised down from the 2013 estimate of 750,000 getting on average £9 a week extra over the same period.

Many people are now confused or disappointed as they were expecting to receive the full rate pension from the first day of the new system. They were encouraged by comments from the previous government, including David Cameron, who referred to the new system as being “more generous” than the old.

This weekend, Baroness Altmann, the pensions minister, said the job of explaining the new state pension had not been done “well enough”.

What are the other important changes that I need to know about?

In telling people about the changes, the previous government had focused on highlighting the winners from the reform, without giving the same publicity to the more contentious aspects of the policy changes.

Only 37 per cent of people reaching state pension age in 2016 — the first year of the new pension — will receive the full new rate. This proportion is only expected to rise to 80 per cent by 2035. During this time millions of “contracted out” workers who do not qualify for the full flat rate are expected also to receive income from a workplace pension.

The new pension will not be any more generous. The government is not spending any more money on the new pension and in fact expects the policy to start bringing in savings in about 25 years.

What are the changes that I should know about?

The less publicised changes of the new pension are substantial. People will have to work or contribute longer to get the full flat-rate pension from 30 to 35 years. There is a new cut-off of 10 years, with anyone with a NI record below this not getting any pension.

Significantly, the ability to inherit a spouse’s pensions, which has been enormously beneficial to women who have not built up a decent pot for themselves, will disappear under the new system.

There will be some transitional protection for people who have built up pension rights under the old system, but in future women or men should not expect to inherit their partner’s state pension.

Who is affected?

Only those reaching state pension age from April 6 2016 will qualify for the new state pension. This includes women born on or after April 6 1953 and men born on or after April 6 1951.

If you are unsure of your state pension age, a calculator on the Department for Work and Pensions’ website will work this out for you.

Anyone aged 55 and over can also apply for a personalised state pension statement. This will include information on any deduction made for years when you may have been “contracted out”.

It is a very good idea to check the statement for gaps in your record. If you are concerned about your calculation, you can ask for it to be checked.

What can I do to boost my state pension?

New material being published on www.gov.uk highlights the options available for people to increase their new state pension.

For those who can afford to, there is a chance to plug gaps in an NI record by buying “Class 3 NICs”. For example, a 60-year-old woman could buy an extra £225 a year of state pension income for a cash outlay of £730, through the Class 3 NICs deal.

Those who are able to work can continue to build their NI. Those receiving benefits, such as carer’s allowance, or child benefit or jobseeker’s allowance, should automatically have credits put towards their NI record.

However, there are more than a dozen credits that need to be claimed, which could easily be overlooked. These include those who are carers who are not in receipt of benefits but caring for more than 20 hours are week. More information can be found on the government’s website.

State pension age calculator: gov.uk/calculate-state-pension

Get a state pension statement: gov.uk/state-pension-statement

National insurance credits gov.uk/national-insurance-credits

Copyright The Financial Times Limited 2017. All rights reserved.
myFT

Follow the topics mentioned in this article

Follow the authors of this article