The new flat-rate state pension: winners and losers

From 2016, a new single-tier state pension will replace the existing two-part system. The aim is to reduce the complexities of the state pension system and provide clarity regarding the likely value of individuals' income on retirement. However, recent research suggests that the impact of the reforms could be wide-ranging.

The reforms: an overview

The flat rate state pension will apply to new pensioners from 2016, and is expected to be worth around £146 a week, replacing the current state pension of £110 a week plus various means-tested top-ups.

The reforms will see a merging of the state second pension with the basic state pension, together with the end of derived entitlement to the basic state pension, whereby a married or widowed individual receives a pension based on the national insurance contributions made by their spouse or civil partner, rather than their own working history.

Those people already receiving a pension, or those who reach state pension age prior to 6 April 2016, will continue to receive payments under the current system. 

The impact of the changes

A recent study from the Institute for Fiscal Studies suggests that some individuals who are close to the state pension age will see a boost to their state pension entitlement as a result of the changes.

Those most likely to benefit under the new system include:

• individuals who have spent long periods out of work or in low paid jobs
• the long-term self-employed (both of these groups include a high proportion of women)
• those who chose to contract out of the earnings-related second state pension.

However, the study also suggests that in the longer term, many individuals will see a reduction in their state pension income, with the exception of the long-term self-employed.

Those expected to lose out under the new flat-rate state pension are:

• younger workers, especially those born after the mid-1980s
• higher earners, who will experience a more significant reduction than lower earners
• individuals who would receive a state pension on their partner's record may not be able to do so in the future. However, those paying a married woman's reduced rate contribution may be protected.

Whatever impact the reforms may have on your own personal circumstances, it is highly likely that you will need to supplement your state pension income by means of a company or private pension scheme. For more advice on your financial planning needs, please contact us.