New figures from the Department for Work & Pensions (DWP) have highlighted the huge gap between the highest and lowest State Pensions.
The figures show that approximately 130,000 people get less than £7 per week, with around the same number of people getting more that £230 per week, a gap of more than £220 and equivalent to more than £10,000 per year.
Experts believe it is generally men who get the higher State Pensions with women typically getting less.
Low State Pensions
There are two main reasons behind the differences between the highest and lowest State Pension.
Firstly, incomplete National Insurance records often mean pensioners, particularly women who have stayed at home to look after children as well as carers, do not get the full State Pension.
Secondly, the array of State Pension tops ups, including the Graduated Pension, SERPS (State Earnings Related Pension Scheme), and S2P, mean that the additional weekly pension, above the basic State Pension can vary hugely.
A retiree who has a full National Insurance record and didn’t opt out of the top up pension, e.g. SERPS, would receive the largest pension from the state. However, someone who had a full National Insurance record and opted out of SERPS, or equivalent, would have a full basic State Pension and a Personal Pension housing the SERPS rebates.
The level of income produced by opting out of SERPS would depend on a variety of things, most notably investment growth and Annuity rates, with the final income potentially being high or lower than that which would have been given if the decision to opt out had not been made.
Flat rate State Pension
The introduction of the flat rate State Pension should help eradicate some of the very low pensions currently being paid. However, it is clear that some pensioners would have been better off under the old system.
It is believed that the flat rate State Pension will be set at around £140 per week when it is introduced later this decade. Whilst good news for some people, such as stay at home mums and carers, who may not have a full National Insurance record, it will not affect people who are already retired. Meaning many thousands of people, on very low State Pensions, will still have to navigate through the complexity of the means tested state benefits system.
Government ministers hope that the new flat rate State Pension will reduce complexity in a system which the Pensions Minister, Steve Webb, has said would “baffle Einstein”.
Mr Webb commented further by saying: “The range of state pension payouts at the moment is simply staggering. The current system is so complex it would baffle even Einstein. Worse, if people have no idea what they will get, they can’t make sure they have enough savings for their retirement.”
Further details of the new flat rate State Pension will be released later this year when the government publishes a White Paper.