The Pension Roundabout

Posted on: 26 April 2016 by Steve Wanless

Pensions may have taken a back seat at the Budget, but they are back in the news.


The new state pension system, five years in the offing, has just been introduced and many are finding themselves some way short of receiving the single-tier weekly official rate of £155.65.

Some will have been expecting the shortfall, having enquired from the Department of Work & Pensions (DWP) about what they were likely to receive on retirement age – but many others will be shocked, and wondering why?

Headlines announced: “Most will lose out on pensions” and “Beware the state pension lottery”.            

A major change like this was always likely to cause initial confusion and unfortunate anomalies, but the majority expects to receive its due and, hopefully, the winners and losers balance themselves out.

Yet, analysis by the Institute of Fiscal Studies (IFS) found that fewer than one in five would get that precise amount (£155.65) when reaching the state pension age in the next four years. Roughly one on four (23%) would get more –but most (61%) would get less.

The new state pension

The new system was announced in 2011, promising a bigger, fairer payment, one that was inflation-linked. “Fit for the 21st century” was the politicians’ boast.

To get the full amount, 35 years of National Insurance Contributions (NICs) are needed. As most people started working in their early 20s and some would have paid 40 years of NICs, that didn’t look much of an issue.    

But we had forgotten about the continual regulatory meddling that has gone on with pensions – and most other aspects of our financial welfare – by politicians of all parties over the years.

Before this new state pension system took over, there was a top up to the basic state pension (£119.30), which was based on your earnings. One of the reasons for your new state pension falling short is that the government allowed people to opt out of this additional pension, which was known as the graduated pension, Serps or the second state pension (S2P).

“Opting out” meant paying less NICs. Many of those who did so had their own workplace final-salary or money-purchase pension schemes; and many of those not getting the full £155.65, consequently, will have other pension income.

“The aim,” said a spokesperson for the IFS, “is to replace the complex mess of existing rules with a new, fair, simpler system that rewards a wide range of contributions – whether that be paid employment or caring for children – in exactly the same way.

“We estimate that women will gain on average £5.20 per week in additional state pension income at the state pension age, and those who have been self-employed for at least 10 years will gain an average of £7.50 per week.”

“But continued complexity is unavoidable in the short run. There is a considerable risk of disillusionment as people start claiming pension incomes this year.”

Winners and losers

Those hardest hit are the younger generation. Again there are winners and losers, and again the losers outnumber the winners.

Of the 8.4 million workers in their 20s, around 75% will lose an average of £19,000 over the course of their retirement, while the other 25% will be better off by an average of £10,000.

Of the 7.7m workers in their thirties, about 66% of them will be worse off on average by £17,000, while the remainder will be better off by £10,000.

Many have argued that the old system was unsustainable and that successive governments have continued to kick the pension can down the road. Everyone agrees it will take a few years for this new state pension system to “bed in” – and many more to judge whether it is working as intended. To order a pension forecast and know where you stand call Future Pension Centre Helpline on 0345 3000 168.

A guide to our attitude and response to pension changes can be judged by the slowdown in the urge to empty our pension pots since George Osborne’s new pension freedoms came into force a year ago.

In the first three months, 220,000 pension pots were accessed to remove some or all of the money; the tally for the last quarter of 2015 was 127,094.

Those taking their entire pot also dropped, by 6% to 52% from the previous quarter.

And unlike the then-pension minister Steve Webb’s crack about pensioners being able to spend their money on a Lamborghini if they so desired, the money sense shown would credit the advice of any Independent Financial Adviser.

While 18.5% is being used to top up income – and that’s what pensions are for – the next 17% has been re-invested, then 12% going on home improvements, 9% on clearing unsecured debts and 7% on buying your own property. That’s almost 65% spent and not an indulgent item in sight!

The list continues – new vehicles (7%), paying the mortgage (5%), purchasing buy-to-let properties (5%), budget concerns (3%), holidays (2.5%) and weddings (1%). Very little appears to have been frittered away.

The Financial Conduct Authority (FCA) estimated about a fifth of those accessing their pensions took “guidance” from the government-backed Pension Wise.

Interestingly, a survey by the Institute and Faculty of Actuaries suggested that nearly a third of those asked did not know the difference between this free “guidance’ and the financial advice offered by an IFA. Those confused were probably those who had opted for the free “guidance”!


For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail or take a look at our website


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