12th January 2015
Just 45% of those retiring between next year and 2020 are set to receive the full new flat rate state pension and a mere one million are set to get less than 86% according to Hargreaves Lansdown.
The revelation comes on the back of a freedom of information request submitted by the fund and stockbroker.
Under the new pension freedoms, retirees might already have spent any private pension savings they have accumulated before they find out just how much they can expect from their state pension.
Tom McPhail, head of pensions research at Hargreaves Lansdown said: “The new state pension will ultimately be a simpler and fairer system. However in the short term it will be complicated and many people are likely to get less than they may expect. With the new pension freedoms meaning that they will be free to spend all their private pension savings, it is imperative that they receive a proper state pension forecast. Without this, they could get a nasty shock when they do reach state pension age.”
Approximately 3.5 million workers will reach their state pension age between 2016 and 2020. Of these, just 45% will be entitled to receive a full new state pension of at least £148.40.
This means nearly two million pensioners will get less than they might have been led to expect by the government.
With the new pension freedoms due to start in April 2015, all these people will potentially be able to access their private savings before their state pension age.
Some 30% of pensioners will get less than 90% of the new state pension, meaning that they will be entitled to a state pension income of no more than £133.56 a week
State pension entitlement for those retiring between 2016 and 2020
|Income wk/pa||Proportion of £148.40||Proportion of retiring pensioners|
|£89.04/£4,630||At least 60%||
|£103.88/£5,401.76||At least 70%||
|£118.72/£6,173.44||At least 80%||
|£133.56/£6,945.12||At least 90%||
|£148.40/£7,716.80||At least full new state pension||
In fact the position is slightly worse than stated according to the firm. This is because the projections provided by the DWP are based on the current Pension Credit minimum income of £148.40, whereas the state pension in 2016 is likely to be around £155 per week – based on the assumption of two years’ worth of increases at 2% a year.
This means the 90% threshold is actually only going to be around 85% of the new state pension; so 30% of pensioners – 1 million people – will be getting less than 85% of the new state pension.
Why will they get less than 100%?
The majority of people falling short of the full state pension are likely to have been contracted out during their working lives; others who get less than 100% are likely to be those with interrupted National Insurance contribution histories such as mothers and the self-employed. The formula for calculating the new state pension entitlement is complicated. For those who have been contracted out of the second tier state pension it involves making a deduction from their state pension entitlement to reflect the fact that they have been able to build up a larger private pension using the National Insurance rebate.