This note looks at the amount of New State Pension (NSP) that NAPS/APS pensioners can expect to get. Anyone receiving or due to receive the current State Pension (SP) is unaffected. All figures used are in today’s pounds.
If you reach State Pension Age on or after 6 April 2016, you qualify for the New State Pension (also know as the Single Tier Pension) not the current State Pension . Deferring your taking the state pension does not affect this, so if you reached State Pension Age before 6 April 2016, but defer taking it until on or after 6 April 2016, you will still get the current State Pension.
The NSP is currently expected to be £155.65 per week (pw). The current State Pension (SP) is £119.30 pw (both figures are for the 2016/17 financial year). You need 35 years of National Insurance (NI) payments to get the full NSP, but currently need 30 years of National Insurance payments to get the full SP.
However those of us on an APS or NAPS pension, or due to receive one, also reaching State Pension Age on or after 6 April 2016, will probably not get the full benefit of the New State Pension, for two reasons. Here they are:
If you qualify for the current SP, you can defer taking it at a very generous rate: for each 5 weeks deferment you get an extra 1% state pension, once you take it, for ever. This is about 10.4% for each year deferred; if you defer for 5 years then live at least about 9.6 years more after taking the SP, you have won (ie received more in total state pension payments than if you had not deferred). However, the discount rate for deferrers of the NSP is less generous, you get an extra 5.8%, not 10.4%, for each year deferred; if you defer for 5 years, you have to live at least about 17.2 years more after taking the SP, to win. This new arrangement seems fair, given that someone aged 65 in England is currently expected to live on average an extra 19 years (men) and 21 years (women); the current State Pension deferment rate must have dated back to the days when life expectancy was about 7.6 years less than it is now.
APS and NAPS members are “contracted out” of the State Second Pension. We typically, for many years, paid 10.6%, not 12% National Insurance (NI) payments. This is taken account of in the calculation of the NSP. The calculation is complicated and (to us) unknown, but there appears to be a severe reduction in the NSP one is entitled to. The Department of Work and Pensions (DWP) also calculates what one would have received under the current State Pension rules, and one receives the bigger of the two figures, so no one “loses out”. Here are two real examples: Person A and Person B reach state pension age in August 2016 and November 2016 respectively. They both had over 35 years NI contributions (enough for the full NSP if not contracting out). They both worked for BA, for about 32 and 26 years respectively. The NSP quotes from DWP used to give what one would qualify for under the old and new schemes, Person A was told in Jan 2015 that they would receive £116.20 pw under the existing state pension rules and a mere £22.43 pw under the new state pension rules, so their state pension will be £116.20 pw. The quoting method has changed slightly; in Nov 2015 Person B was just told their state pension will be £119.74 pw. Person B was also told there is also a Contracted Out Pension Equivalent (COPE) of £100.53 pw (an amount very similar to their Guaranteed Minimum Pension (GMP)). DWP says the COPE will be paid “by your workplace pension scheme” and that adding their New State Pension and COPE together gives £220.27 pw. We assume this is to reassure Person B, as £220.27 is more than the full NSP of £155.65, but of course the COPE is part of the APS/NAPS pension, not an additional payment! Both Person A and B’s state pension quotes from the DWP are effectively at the old (ie current) state pension level, not the new state pension level, due to their contracting out.
It does seem unfair that two people with identical work histories would see their state pension be £119.30 if they reach state pension age just before 6 April 2016 but £155.65 if just on or after 6April 2016. However, one could argue that if all NI contributions are towards just the state pension then those contracting out should receive a fraction 106/120 (the ratio of the 10.6% NI rate they paid to the 12.0% full NI rate) of the NSP: this is £137.49 (and would be even higher, closer to the full £155.65 if they were not contracted out for all of their NI contribution years). (This is a somewhat drastic assumption; NI payments also go towards the NHS; then again vehicle licensing tax, once called the “Road Fund” is not just spent on roads, the government effectively just has one pot of money). Another way of looking at it is to say that if their 35 NI contribution years were all contracted out, then they really contributed 35*106/120=30.9 years, ie they were about 4 years short of the full 35 years, so should pay a further 4 years of 12% NI payments to get the full NSP. The calculation that is used remains a black box, but Person A’s £22.43 pw quote under the new rules is just about 5/35 of the full NSP of £155.65. Person A worked about 5 non-BA years and was not contracted out for those years, so a bleak view of the NSP calculation based on this one person is that contracted out years contribute nothing towards the NSP calculation.
Persons A and B are not losing out. They will get roughly the same state pension as those, slightly older, who qualify only for the current state pension. A bigger concern is those with, say, 20 years contracted out NI payments who now go on to work a further 15 years for BA, paying at least 12% NI payments. We do not know what NSP they will receive. If their 20 years contracted out count for nothing (as in the bleak view scenario on Person A), then they would only get 15/35*£155.65=£66.70 pw under our inferred NSP rules, which is less than the current State Pension, so they would only get the current state pension of £119.30. This is probably a worst-case scenario but we need to know now what will happen in circumstances such as these, rather than having to infer or guess.
A big danger is that these people will be assumed to be receiving the full NSP. This was the general impression DWP seemed to give out when the NSP was first announced a few years ago. That can then be used in other arguments about how they should be treated in other ways. For example the (although justified) lower deferment rate starting on 6 April 2016 is not as generous as that before, but it applies only to those receiving the New State Pension (even though the amount received in State Pension for contracted out people will only be the level of the current State Pension). The argument of the NSP always being higher/better than the SP is also being used by DWP as one of the reasons why 0% or capped-at-3% APS/NAPS inflation rises for the GMP part of the APS/NAPS pension are more than compensated for by the New State Pension. That argument collapses when the amount received under the NSP is the equivalent of the SP.
From April 2016, the only way for those already retired yet under state pension age to increase their state pension towards the £155 figure would be to take paid employment from where the necessary NI contributions could be made. Each year of employment after April 2016 increases NSP by about £4 per week, up to the maximum NSP.
To summarise, the New State Pension received will probably be at the same level as the Old State Pension for most of the APS and NAPS pensioners who, because of their age, qualify for the New State Pension. Deferment benefits are due to become nearly half of what they were before.
There appears to be no way for those becoming state pensioners in the immediate future to make further NI payments to ensure a full NSP. We need to know what the effect on state pension payments will be for people in the middle of their working career.
DWP issued a note in February 2016 explaining the NSP. Here is a link to it: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507213/your-state-pension-statement-explained-dwp042.pdf
It is very detailed but does not give the formula that works out the NSP that contracted out people will receive.
We stress again, as in the previous note about GMP, that this NSP effect is solely the responsibility of DWP. BA Pension rules for APS and NAPS are unaffected.
If you are 55 or older, you can ring DWP on 0345 300 0168 (8am to 6pm Mon-Fri), give them your name, address and National Insurance number and ask for a quote on what your state pension will be. This quote will then arrive by post 2 to 3 weeks later.