Guest Comment: What you need to know about the new State Pension

With 600 days to go until significant reforms are introduced to the State Pension, Pensions Minister Steve Webb explains the six things he believes you need to know.

1. Clear new pension

I realise a lot of the jargon around pensions is just confusing – and off-putting.

People want to know what they are going to get from their State Pension and that when they save extra for retirement to build on their State Pension, their hard-earned cash is safe and working for them.

I am proud to say that our reforms are making that happen.

Pensioners are already benefiting from the Government's triple lock commitment in this Parliament – the State Pension has risen each year by whichever is the highest out of earnings, prices or 2.5%.  The basic state pension is worth £440 a year more in 2014/15 than if it had been up-rated by earnings since the start of the Parliament.

Thanks to this policy, the basic State Pension today is at its most generous relative to average earnings than at any time since 1992.

In future, the new State Pension will simplify the system, so that people can know far more easily where they are starting from when they look at their own workplace pension saving and retirement plans.

2. When's it happening?

The State Pension is changing on 6 April 2016 for new pensioners.

People reaching State Pension age before that (people born before 6 April 1951 for men or 6 April 1953 for women), will continue to receive their State Pension under the current system.

We want to simplify the system – but because we have such an incredibly complicated legacy to deal with, it will take some time to get there.

It's important to point out that there will be transitional arrangements, meaning that National Insurance contributions paid both before and after 2016 will be recognised.  

3. How much will I get?

The starting rate for the new State Pension won't be finalised until closer to its introduction in April 2016, though we have been clear that the full rate will be set above the basic level of means-tested support, which is currently £148.35 for a single person.

One thing that won't change is the contributory nature of the system. In other words, whether or not a person is entitled to the full rate will continue to depend upon them having made sufficient National Insurance contributions during their working life.

What makes the new system fairer is that there is better recognition through National Insurance credits of the valuable social contribution women make, for example, if they take time out of work to look after elderly parents.

A pension will only be payable if at State Pension age a person has a minimum of 10 qualifying years.

In the longer term, we estimate that over 80% of people will get the full level of the new State Pension. But over the next few years, because of those transitional arrangements we are putting in place to ensure that everyone's previous contributions are reflected, different people will get different amounts.

4. Contracting out

This is something that few people have heard of, but it will actually affect many.

Of those people reaching State Pension age in the first two decades, we estimate that around 75% will have been contracted out at some point or other. Around six million people are still contracted out – mostly public sector workers.

Generally, this means that you have paid lower National Insurance contributions at some point and paid that money you saved into a workplace or personal pension instead.

During the time you were paying those lower National Insurance contributions, you weren't paying in to the Government additional State Pension, also known as SERPS or State Second Pension. So your new State Pension may reflect this.

But the good news is that you will have additional income from a workplace or personal pension, and may be able to boost your State Pension income by continuing to work, or claiming National Insurance credits, after April 2016.

This is a complexity which we're abolishing under the new system – but again, to ensure fairness across the board, and that everyone gets what they have paid for in National Insurance contributions, transitional arrangements are in place.

5. Who gains?

Key gainers under the changes are those people who would under the current system have low levels of additional State Pension.

Often these people will have taken time out of work in the past to look after children or care for people with disabilities, and before 2002 they didn't receive protection through National Insurance credits for the additional State Pension.

This will also benefit many low-income workers and the self-employed.

6. How can I find out more?

Check how you will be affected by the reforms on Gov.uk.

Those reaching State Pension age shortly after April 2016 will be able to check how much they will be eligible for using a new State Pension Statement service from later this year.

Views do not necessarily reflect those of MoneySavingExpert.com.