More spin than substance on women’s pensions

by Dr. Ros Altmann

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The Government has just announced changes to the state pension system which will allow more people, particularly women, to retire with a full pension. This follows pressure from the indomitable Baroness Patricia Hollis, who has been trying to persuade the Government that it is unacceptable for only a third of women to retire on a full pension. Today’s announcement is designed to help increase the numbers of women with full state pensions, by allowing them to make up more missing years of their contribution record. Currently they can only make up the last six years, but today’s announcement says that the Government will let women retiring between April 2008 and 2015 buy back a further six years worth of missing contribution years – 12 extra years in total.

To get the full state pension, people need to have a full National Insurance contribution record – 39 years for women and 44 years for men. Last year the Government introduced changes that mean everyone with only 30 years contribution record will get the full pension from 2010 onwards. Today’s change is designed to help more women achieve the 30 year record.

This sounds good and some commentators have suggested that the Government has at last decided that women will be entitled to a full state pension now. Sadly, this is not the case and today’s announcement seems to me to be rather more spin than substance. The complexity of our system and the details in the small print mean one has to be careful about how to interpret this announcement.

Let me try to set out the facts.

Firstly, the good news…
This does not just apply to women, but to anyone who has not managed to accrue a full National Insurance (NI) record. Men who stayed at home as carers are also entitled to buy back extra years, as are disabled people or those who have been ill and not worked a full career. But of course, the majority of those without full NI records are women.

Now the not so good news…
People will have to pay to get the extra years of entitlement – it is not free. At the moment, the Government charges around £420 for each year of contributions that is bought, so if someone needs an extra 10 years’ worth of contributions they will have to pay over £4,000.

Only people who already have 20 years of NI contributions will be able to buy back the extra years, so it does not apply to all women.

Now the worse news…
None of these changes applies to past pensioners. Anyone who retired before April 2008 cannot buy extra state pension entitlement at all.

Furthermore, the Government says it will increase the cost of buying back extra years. Treasury concerns over costs mean it will increase the amount that people need to pay in order to get their extra state pension. It has not yet decided how much extra it will charge.

So is this a good deal?

The short answer is probably yes, at least for some people, especially women who are more likely to have an incomplete NI record.

But for many this may not be good at all. In fact, I would argue that anyone who is thinking of taking advantage of the opportunity to buy extra years of NI should get advice first. Preferably from an independent financial adviser, but if that is not possible then ask the Citizen’s Advice Bureau or perhaps the Pensions Advisory Service National Helpline (0845 6012923).

What are the risks?

There are many risks entailed in buying back missing years of NI and these risks make it difficult for people to know whether this is actually a good deal for them or not.

People would probably be wise to wait until just before retirement before making their decision, because then they will be in a better position to judge whether this is likely to be the right thing for them to do.

Anyone who might qualify for the means-tested Pension Credit should not buy back missing years. Pension Credit pays a single person around £130 per week and is available to everyone over age 60, irrespective of their NI record. A full basic state pension is only around £90 a week, so people who have little or no savings or other income could claim pension credit and get far more than the full basic state pension anyway.

Anyone who is very ill and not expected to live long past age 60, would be unlikely to be best advised to spend money on buying extra years of NI.

Another risk factor is that the Government could cut the state pension in future, which would alter the economics of the decision to buy extra years.

If women qualify for a full pension via their husband they will also risk wasting their money by buying added years.

The bottom line…

These measures are a further rearrangement of the deckchairs on our sinking state pension system. Yes, they will make some people better off but they won’t solve the problem that our system is far too complicated, still contains many unfairnesses associated with the qualification criteria and is impossible for people to understand. It is not fit for purpose and we need a radical rethink of how we support our elderly population.

The ludicrous complexity of our system allows minor changes to be portrayed as major concessions but does not deal with the fact that we have the lowest and most complex state pension system in the developed world.

With an ageing population, this must change but so far politicians would rather tweak our existing system than design one that is fit for the 21st century. A flat-rate citizen’s pension for everyone over a particular age would finally sort out our problems. When will we get it?