Hymans identifies three types of state pension loser

Most people will be worse off under the new State pension across three distinct groups of single-tier losers says Hymans Robertson.

People whose foundation amount is less than the full single tier and who don’t have enough years left between now and SPA to get up to the full level form the first group.

Those who have accrued more than the single tier amount, who are largely those contracted in, form the second group. These individuals will not build up anything further from April 2016. 

The third group is those who were contracted out for a short period in the 1980s and early 1990s, where a relatively short period of contracted out service can result in a far bigger deduction from the foundation amount than they may be expecting.  Some people in this category could be as much as £20,000 worse off over the course of their retirement, says Hymans.

The consultancy says the new flat rate pension is not simple at all, but fraught with complexity.        

It says less than half those reaching SPA shortly after 2016 will earn full single tier pension of £155 per week

The winners will be the long term self-employed and those not in employment who will generally be £2,000 a year better off under the new system.

The majority of individuals who have been contracted out will be winners as from April 2016 they will build up more state pension each year than they do currently. Lower earners currently receive a State pension top up will pay higher National Insurance Contributions from April, seeing an equivalent reduction in take home pay, but build up less State pension each year.

Hymans Robertson partner Sue Waites says: “There’s a widespread expectation that everyone who reaches state pension age from April 2016 will move from a basic state pension of £115 to a new flat rate of £151 per week. The reality is quite different. The transition to the new State pension brings many complications, particularly for those approaching State Pension Age (SPA). Some will be very surprised at how much they actually get.  

“The introduction of the Single Tier pension is hailed as an exercise of simplification, but working out who the winners and losers are is horrendously complicated. The picture is far from clear, particularly for those who are currently close to SPA. These individuals should get in touch with the DWP to find out what they’re likely to receive and avoid unpleasant surprises.

“Over the long-term, broadly speaking, the majority will lose under the new State pension. Under the current regime, although basic state pension accrual is limited to 30 years, additional State pension can be accrued over an entire working life – potentially up to 50 years. Under the new system it will be capped at 35 years with no additional State pension so there will be less scope to build up a more generous entitlement. 

“The biggest issues lie with those approaching retirement. The picture here is incredibly complicated due to the way in which your entitlement is worked out in April and then beyond. Essentially it’s a transition issue.”