Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Q. Why do people retiring now get a bigger State Pension than me?
This is a common conundrum for retirees - and crops up in political debates too. In 2023, a government petition claiming that older pensioners are “treated like second class citizens” gathered over 16,000 signatures1.
The perceived unfairness stems from the fact there are two types of state pension in existence today. There is the new State Pension - which was introduced in April 2016 - and an older version, called the basic State Pension. Anyone who hit pension age before April 2016 falls under the old regime.
At first glance, there is a clear discrepancy between the two. The new State Pension is currently worth up to £230.25 a week. The full basic State Pension pays just £176.45 a week2.
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It is important to realise, however, that the basic State Pension is often topped up by money from elsewhere. Between 1961 and 2016, workers could boost their retirement pot in a variety of ways, as shown in the image below.
The system was horribly complicated, but rested on the idea that people could increase their national insurance (NI) contributions while they were working in order to secure more money for later in life.
The ‘basic’ weekly figure of £176.45 is not always illuminating, therefore. According to a 2023 government response, the state can pay retirees “in excess of £200 on top of the basic State Pension, which may result in a much higher State Pension amount than the new State Pension”3.
Younger pensioners also enjoy some protection. Benefits accrued under the old regime are taken into account when the new State Pension is calculated, meaning no one should be worse off under the new rules.
In short, the government insists that although the systems are different, they both reflect the NI contributions individuals have made over their lives.
Shifting timelines make like-for-like comparisons even harder. To receive the new State Pension in full, you must have made 35 years of qualifying NI contributions - but to get the basic State Pension you need only 30 years’ worth. Meanwhile, many people will be waiting longer to be paid under the new rules, given the retirement age is rising.
Things get even knottier at the start of every tax year. The Triple Lock ensures that the State Pension rises by the highest of three measures: 2.5%, average wage growth, or inflation. This meant it climbed by 4.1% in April, in line with wages. However, this uplift only applied to the new State Pension and basic State Pension. The top-up payments mentioned above only ever increase in line with inflation.
The State Pension will always attract scrutiny and criticism. Be careful when comparing your situation with that of others, however. The amount you receive will depend heavily on your personal circumstances and the decisions you made during your working life - and unravelling decades worth of legislation is enough to give anyone grey hairs.
If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.
Read more of our responses:
- Moving or retiring abroad - what happens to my Fidelity SIPP?
- Can I reinvest pension tax-free cash and claim more later?
- Do inherited ISAs continue for the rest of a widow’s life?
Source:
1,3 Petition.parliament.uk. 13.08.23
2 Gov.uk
4 Chartered Insurance Institute. 2024-25
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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