The new flat-rate, or single-tier, state pension has come into effect for everyone retiring after 6 April, 2016.
The government argues it is simpler – and that over the next 15 years, most people will end up getting a higher pension.
It is currently worth £155 a week for those who qualify, or around £8,000 a year.
Women, and the self-employed, are among the groups that, on average, should benefit.
But there will be losers too – especially for those currently in their 20s and 30s. And in the long run the new system will save the government money.
So how does the flat-rate pension work?
What happens if I have already retired?
If you retired before 6 April, 2016, you will continue on the old two-tier system. That is, you will receive a basic state pension, plus top-ups.
These consist of pension credit, for the low-paid, as well as payments from the second state pension (previously known as Serps), if you qualify.
Who will be eligible for the new state pension?
Men born after 6 April 1951, and women born after 6 April 1953.
To qualify for any pension at all you will need to have 10 years of National Insurance contributions (NICs). Previously there was no minimum.
As a result of this, Age UK has calculated that 70,000 people will no longer qualify for any state pension.
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As changes to the state pension come into place, who will financially benefit, and who will be worse off?
NICs don’t have to be paid in consecutive years, and some parents, carers and jobseekers have special exemptions. Each year of NICs will add £4.44 a week to your pension, at current prices.
To qualify for the full new state pension, you will need to have 35 qualifying years. Previously this was 30 years.
Check your own state pension age here
Will some people get less than £155?
Yes. Anyone who contracted out of the second state pension before 6 April 2016. This will particularly be the case for millions of teachers, NHS workers, police officers and members of the armed forces – in other words public sector employees.
Such workers will have paid a lower rate of NICs. Instead they will have paid extra into a workplace pension scheme. As a result they will be paid a reduced state pension.
How much less will depend on how long they were contracted out for. Government figures show that only 45% of pensioners will get the full amount in the first five years of the new state pension. As many as two million people will not get the full amount.
How can I tell if I was contracted out?
Look on an old payslip. On the National Insurance line, the letter “D” or “N” means you were contracted out. “A” means you were not contracted out. However, from 6 April 2016, no-one will be contracted out, as contributions to the second state pension will end.
Those contracting back in will therefore go back to paying the standard – higher- rate of NICs. For most people their contribution rate will rise from 10.6% to 12% of qualifying salary – or around £37 a week on average.
Click here to get an estimate of your own state pension
Will some people get more than £155?
Yes. Anyone who paid into the second state pension will retain that as a protected payment and could therefore earn more than £155. In some cases, part of the pension credit payment will also be retained.
No one will lose out in reality under the new system – in the early years – as in effect there will be transitional arrangements.
Who will be the long-term losers?
Over the long-term, younger people will lose out. Many will get less under the new system than they notionally would have received under the old system.
This is because they will pay standard NICs, yet they won’t qualify for the second state pension, which is being abolished.
The Pensions Policy Institute has calculated that three quarters of those now in their 20s will lose a notional £19,000 over the course of their retirement.
Two-thirds of those now in their 30s will lose £17,000. However the remainder will gain an average of £10,000 in both cases.
Others with less than 35 years of NICs will also lose, as previously they would have qualified for a full state pension with just 30 years of contributions.
Who will be the long-term winners?
Over the first 15 years of the new state pension, the government says that three-quarters of those reaching state pension age will get a higher pay-out than they would have done under the old system.
That means that by 2030, three million men and three million women will benefit.
However, government documents show that the proportion of people doing well will gradually decline the further out you look.
By 2050, around half of retirees will get a higher pay-out, with half getting a lower pay-out. Assuming a pension age of 70 by then, you can make this generalisation:
People born before 1980 can, on average, expect to do better out of the new system. People born after that date are likely to fare worse.
Source: BBC News