Social Security

The New Flat Rate Pension Benefits Scheme Starts in April 2016. Are You a Winner or a Loser?

The New Flat Rate Pension Benefits Scheme Starts In April 2016

The new flat rate state pension is a marked reduction over that which has been in place for many years. It is arrived at by combining the existing basic state pension and the State earnings related pension, (SERPS).

The new pension will be a maximum of £144 per week in total. On the existing scheme many would have expected their total state pensions, (including SERPS) would have been up to £265 weekly.

In April 2016 payment records will be translated into a single amount. This is called the “foundation amount”. If it’s more than £147, the state pension will be fixed at the higher amount.

At April 2016,  if NI contributions are lower than the new pension rate workers be able to build on the, “foundation amount” at the rate of £4.21 a week per year until the figure of £147 is achieved, (or whatever the figure is at that time). This includes Public Service workers who might also be contributing to an occupational final salary scheme.

At retiral, if the full, “foundation amount” has not been achieved pensioners will still be able to apply for a means tested pension, “top up” through pension credit, as at present.

Adding salt to the wounds the new pension arrangements are tied to an upward revision in the retirement age for women, increasing from age 60 to 67 and for men from age 65 to 67. Further increases are planned and it expected both sexes will be set a retirement age of 70y before 2020.

Someone in his/her late 50’s stands to lose around £75-100k over the life cycle of their pension due to the changes. This brutal reduction in the state pension will bring hardship to many in their later years and is a disgraceful betrayal of all those who have paid their national insurance contributions over their working life.

The official reasons driving the changes are increased life expectancy. But in reality it is all about a need to cut back on public expenditure, in order that the annual budget deficit and the National Debt can be reduced.

But not citizens are losers. Public Service workers and Civil Servants, (who opted out of SERPS) will continue to benefit from pensions accrued through their final salary occupational schemes,  contributions to which are funded by the government (the tax payer).

Projections are that there are approximately 20 million private sector workers contracted into SERPS. The majority are set to lose out at the time of their retiral as a direct consequence of the changes. Scrapping SERPS, “will mean many low and middle-income private-sector workers, particularly those several decades away from retirement, could be thousands of pounds a year worse off”.

Those who have contracted-in pension schemes will be more likely to be at, or near, the £147 limit in April 2016. They will be capped at that level but will have to pay NI for years for no extra benefit. Under the current rules, they could have earned a combined pension in excess of £200.

The SNP white paper promised a different route would be taken, (including the triple lock) avoiding much of the hardship, about to be visited upon pensioners. But Independence was rejected largely in favour of the staus quo so those who voted, “no” will be able to reap the benefits of that which they sowed.

Triple Lock Protection of State Pension Not Guaranteed.

Triple Lock Pension protection provides a safety mechanism that the state pension, (£144 weekly at April 2016) would increase annually by the highest of; average earnings, inflation or 2.5%. It is anticipated the government will not commit to applying the, “triple lock” safety mechanism and will limit any increase of pension to average earning. Assuming an average earnings of 1% this would result in pensioners losing approximately £600 – a – year. Over 15 years the total loss would exceed £9k. It is just possible the government might decide to impose no uprating of pensions on the basis that the Nation could not afford an increase in which case the annual and 15 year accrued total loss would rise further. The omens are not good for UK pensioners post 2016

Noteworthy is the undertaking in the, “referendum white paper” produced by the SNP, committing to payment of a flat rate pension payment of £160 weekly, fully triple locked providing the protection so much needed in the difficult times ahead. This would have provided, (in 2017/18) a £4 weekly pension increase taking the weekly state pension in Scotland to £164. In 15 years the pension would have been increased to approximately £200 weekly. But the, “no” vote put paid to the changes. Pensioners in Scotland preferred to remain, (to their financial detriment) with the UK pension arrangements.