Relying on the state pension to provide a full retirement income is ambitious, but it can still form a vital component in funding for later life. When planning for retirement, most will factor in state benefits and base further provision on topping-up what they see as a guaranteed income stream.
However, what many do not understand is that National Insurance (NI) contributions only build an entitlement to the state pension, not a pot.
In fact, the NI contributions workers pay today fund today’s pensioners, and so a certain balance between workers and retirees needs to be maintained. With people living longer, the government has no choice but to keep addressing this balance and re-align as necessary. But ever-changing criteria can bring further confusion – and strong opposition – especially for people who are trying to evaluate the amount the can expect and date at which they can expect it.
Changes to the state pension in recent years continue to cause debate. The qualifying criterion was loosened by the introduction of the Pensions Act 2007. NI contributions of 44 years for men and 39 years for women were previously required to receive the full state pension, but this was then relaxed to 30 years for both.
A new state pension that came into force in April was designed to simplify the existing arrangements. But as with many of the recent government changes to pensions, some feel this continues to add to the complexity, especially when looking at the tapered increase for entitlement ages.
“There are a lot of people who are overestimating how much they are going to get from the state pension and are not clear what the qualification criteria is and whether or not they meet it,” says Andrew Pennie, marketing director at Intelligent Pensions.
Under the new scheme, the ‘flat rate’ state pension income has been increased to £155.65 per week from £115.95, but the qualifying criteria was increased to 35 years of NI contributions or credits, which means that for each year of sufficient contributions, 1/35 of the full state pension is accumulated. “When you say there is a flat rate state pension, everyone just assumes they are going to get it – they do not think about how many qualifying NI years they have got,” Mr Pennie adds.
Late equaliser
For many years women were entitled to the state pension before men, but history shows this has not always been the case. Originally labelled as the “old age pension”, the state pension was introduced in 1909 following the Old Age Pensions Act (1908).
Age of entitlement was set at 70 for both genders and, although lowered to 65 in 1925, it was not until 1940, through the Old Age and Widows Pension Act, that women became entitled to their pension at the age of 60. This was due to previous rules dictating that married couples were both required to reach the age of 65 to become entitled to the state pension, resulting in older male spouses having to wait more years.
However, plans to increase the state pension age for women from 60 to 65 were outlined in The Pensions Act (1995) to be phased from April 2010 to 2020. The Pensions Act (2011) not only cemented plans to increase the qualifying age for men and women, but also amended the timetable, as shown in Table 1 (below). Previous plans to increase the state pension age from 65 to 66 were due to be implemented between 2004 and 2026, but this was brought forward to 2018-2020, accelerating gender equalisation in the process.
Table 1: Women’s state pension age under the Pensions Act 2011
| Date of birth | Date state pension age reached |
| 6 April 1953 – 5 May 1953 | 06 July 2016 |
| 6 May 1953 – 5 June 1953 | 06 November 2016 |
| 6 June 1953 – 5 July 1953 | 06 March 2017 |
| 6 July 1953 – 5 August 1953 | 06 July 2017 |
| 6 August 1953 – 5 September 1953 | 06 November 2017 |
| 6 September 1953 – 5 October 1953 | 06 March 2018 |
| 6 October 1953 – 5 November 1953 | 06 July 2018 |
| 6 November 1953 – 5 December 1953 | 06 November 2018 |
| Source: gov.uk. Copyright: Money Management | |
These changes caused such disruption that Women Against State Pension Inequality (Waspi) was formed. The group, started by four women, aims to challenge the government’s decision to increase the state pension age for women with such haste. Waspi says the issue is not with gender equalisation, but the way and speed at which it was implemented.
“So many women are desperate – they have got no money,” says Felicity Read, local co-ordinator for south London Waspi. “This is a vulnerable cohort of women born in the 1950s. A lot of them never had a private pension. They were reliant on their state pension which they thought was a contract they had bought into when they were 15 and have been let down.”
Waspi’s campaign has resulted in a petition attracting more than 193,000 signatures, which in turn has prompted four separate parliamentary debates. On 29 June, Waspi members and supporters held a demonstration outside the Houses of Parliament, which drew support from a number of MPs including former Scottish National Party (SNP) leader, Alex Salmond. Efforts so far have delivered limited success, but this has not deterred the group from its quest. Ms Read appreciates that the government backtracking on its legislation is not feasible, but now seeks compensation for women caught out by the increase.
She also expresses concerns that the swift implementation was against the law. “You are meant to be given 10 years’ notice of any changes, and we have not been given more than about three or four so there is no time to plan for anything else,” she says.
“Women in the affected age ranges have been treated poorly with the changes being phased in too quickly,” says Jonathan Rowley, independent financial adviser at Sheffield-based Hamnett Wealth Management. “The government has been negligent over the way that those affected were not written to about the changes, and many women have had a massive shock.”
No entitlement
The expectation of being entitled to the full state pension regardless of employment could be considered as dangerous, as many people are due to discover. In June, in response to recommendations of the Work and Pensions Committee, the government released plans to write to more than 100,000 over-55s warning them to make further NI contributions or run the risk of receiving no state pension.
Mr Pennie believes that a number of people could be in for a shock when receiving this notification, “If they are budgeting for a certain income and it is not going to come from the state pension, then it needs to come from somewhere else. Perhaps they need to work longer or pay more in and obviously the quicker they can find out the quicker they can take corrective action. But people tend to leave it until the last minute and it is too late to do anything about it. You are then compromising your standard of living or need to go out and find a job.”
Not enough to go round
Concerns about whether the state pension will be available in the future have been rumbling on for many years. Part of this could be due to justifiable fears that the imbalance between more people in retirement and less people working will simply not provide generate sufficient NI credits to pay pensioners.
Sean Irwin, independent financial adviser at Plymouth-based DFP Solutions suggests just that, although he agrees with Waspi’s plight, the change was more about the government saving money rather than seeking a level playing field for state pension entitlement.
However, he says the real focus should now turn towards younger people, “What women are not seeing or talking about is the next generation. I myself will not be able to get state pension until I am 68, and a woman born the same decade as me will be the same. I also imagine that age will increase and it may be too late for the DWP to do an awareness campaign about this issue as it has already started, but it cannot hurt for those that may still not know.”
The introduction of auto-enrolment is another factor, with concerns that current or future governments may believe it provides the solution to retirement funding pressures. “A lot will depend on demographics and the strength of the economy. It is a huge part of the benefits system, so at some point it could come under pressure,” Mr Pennie says.
As with many pension issues, it is younger generations who are the most likely to be affected. But one solution would be for everyone to take control of their retirement income. He adds, “For a young person to put a lot of reliance on the state pension could be misguided – the onus has to be the individual to do more for themselves.”
With Waspi set to continue fighting for women born in the 1950s, perhaps it is the children of these campaigners who could face the biggest fight to receive state pension benefits.
