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State pension changes: The winners and the losers

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There’s a new state pension coming in 2017 - affecting everyone who draws the benefit.

The new state pension will pay a basic minimum of around £144 a week, a substantial increase from the current £107.45 a week.

But with such a big jump, and the measures said to be “fiscally neutral” that means some people are bound to win and others lose.

Yahoo! Finance has taken a look at exactly what’s changing, who will be better off and who will pay for it.

Everyone’s state pension re-assessed

Anyone who has been contracted out of S2P or Serps will have a one-off adjustment made to their pension; Anyone retiring after 2017 with a state and second tier pension worth less than £144 a week will get £144 a week if they have paid 35 years’ NI contributions, if you’re below state pension age in 2017 with a combined entitlement of state and second tier pension of more than £144 you’ll keep that level of pension – but only the £144 part will rise with the triple lock and the rest with CPI; Anyone both contracted in and contracted out of S2P or Serps between 1987 and 2017 will have a one-off deduction to their entitlement based on the amount of time they were contracted out. An addition will then be made for the periods they were contracted in up to 2017.

Simplification of the current system

Current basic and earnings related state pension changed to single tier state pension; Savings credit abolished; Contracting out abolished; Single pension of £144 a week in today’s money - minimum of £41 a week; Triple lock guarantee will continue.

Change in eligibility

The minimum number of years to qualify for the full state pension rise from 30 to 35 years; A minimum period of 10 years will be reintroduced. Anyone with less than 10 years will not get a state pension.

Increases to state pension age

Future increases to state pension will be longevity based; 10 years notice will be required for a change in state pension age; This will be pushed back to the next parliament with a review of age 68.

All contracting out will cease

Contracting out for private pensions and Defined Contribution schemes stopped in April 2012; Final salary scheme member schemes will cease contracting out from April 2017; Members and employers will pay a higher rate of National Insurance from April 2017.

No more inheritance of entitlement for widows, divorcees etc

Individuals will be able to earn their own state pension and the Minimum Income Guarantee remains as a safety net, set slightly below the £144 per week in today’s terms (£142.70 for a single person 2012/13).

Changes to your tax contributions

At present, employees and employers who are members of contracted our final salary pension scheme pay reduced rates of national insurance. When contracted out is abolished, their national insurance contributions will rise (see National Insurance Contribution rates below).

Employee earns £25,000 a year

Increase in employee NIC is £270.65 per annum
Increase in employer NIC is £657.29 per annum

Employee earns £40,040

Increase in employee NIC is £481.24 per annum
Increase in employer NIC is £1,168.65 per annum

This reflects a 1.4% employee and 3.4% employer increase in NIC on earnings between £5,668 and £40,040

The winners

  • Taxpayers: The state should save money, as the new system requires less administration. Money will also be saved because the state pension age – when people are entitled to the income – is being pushed up to match higher life expectancies; by 2026 the state pension age will be 67.

  • Everyone approaching retirement: A simpler system will be far easier for people to understand.

  • The self-employed: Currently the self-employed can only receive the maximum state pension of £107.45 a week, but the increase to £144 will apply to anyone who has 35 or more qualifying years, explained Tom McPhail, head of pensions research at Hargreaves Lansdown.

  • Those who have combined basic and second tier pensions of less than £144: They will benefit from an increase to £144 a week.

  • Younger people who have already accrued some contracted out service: Those who have contracted out, yet still have sufficient time to build up further basic state pension will potentially benefit from the new £144 a week pension plus their contracted out monies.

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The losers

  • Those with less than 10 years’ service at retirement:  Currently the state pension is dependent on how many years of National Insurance contributions a person has made.  Under the new system people will have to have made at least 10 years of work to qualify for the state pension. Therefore, anyone who has made or is set to make less than 10 years’ worth of National Insurance contributions will miss out.

  • Recent immigrants: Anyone recently arrived in this country who isn’t able to build up 10 years’ worth of NI contributions before state retirement age will not get a state pension.

  • Six million workers:  Companies will no longer be able to contract out of the state second pension, so employees will pay higher National Insurance (NI) contributions. McPahail commented: “This could cost someone in a final salary pension scheme earning £25,000 a year an extra £270 a year national insurance.” He added: “We will almost certainly see another wave of private sector final salary scheme closures in response to the abolition of contracting out.”

  • High earners: Under the present system a high earner might have accrued a state pension worth more than £144 a week, but under the new system it will be capped at £144, although benefits notched up until 2017 can still be kept.

  • Anyone who retires before 2017: Anyone who retires before 2017 may feel a little short-changed at missing out on the increases.

  • People in their 20s and 30s: Overall people will lose out by receiving their state pension at later age, this will be particularly relevant to people in their 20s and 30s.

  • Taxpayer (short term): The one-off assessment of about 26 million people’s entitlements, to take place before the changes are implemented, will be costly for the Government.

[Free guide: Four ways to avoid running out of money during retirement]

Final salary scheme members – winners and losers

Following the abolition of contracting out, both employee and employer National Insurance contributions will rise. In the private sector this may precipitate a further wave of scheme closures.

In the public sector, members may well be angered by their increased NI bill, however given that they will then be building up a more generous state pension and still getting their defined benefit public sector pension, they are actually going to do quite well from these reforms.

With thanks to Hargreaves Lansdown for comment and statistics