By David Triggs 11/112015

When is a flat rate not a flat rate? When it's the new state pension. 

The state pension is undergoing major changes for people retiring after next April. In theory it's a change to a simpler system, but there's plenty of confusion and complexity involved, so it's worth exploring your personal position carefully. 

The main change is to the way the pension is calculated. At the moment it comes in two parts: a basic amount which is the same for most people, and then an additional amount which varies depending on how much you've paid in National Insurance over the years (which itself depends on how much you've earned.)

The new system replaces this with a single "flat rate" payment. In theory this means everyone gets the same amount: £148.35 in the first year, with plans to increase this to keep up with the cost of living over time. In practice it’s not that simple.

Who might get more?

Current workers who've earned a lot in the past and thus paid a lot in National Insurance may get a little more than the flat rate. To put it in simple terms, for the work you've done before next April, the amount you paid in National Insurance will affect how much state pension you get; for the work you do after next April, all that counts is whether you paid National Insurance at all.

Who might get less? 

Despite the name "flat rate" you'll only get the full amount if you have 35 qualifying years. A qualifying year is one in which either you were working and earning enough to pay National Insurance, or you got a National Insurance "credit" to reflect situations such as being unemployed, sick or a carer. If you have fewer than 35 qualifying years, your state pension will be reduced proportionally, and if you have fewer than 10 qualifying years you may get nothing.

Another group who'll miss out is people who contracted out. That means they joined a private or workplace pension and chose to pay lower National Insurance contributions, with the money instead being put into the pension. These people will get a reduced state pension even if they have the full 35 qualifying years, but exactly how much the reduction will be has not yet been confirmed.

In both cases, even if these reductions should apply, the government says individuals will always get at least as much overall as they would under the old two-part system.

What to do next?

You can get a forecast on how much your state pension will be through a government service at: https://www.gov.uk/government/publications/application-for-a-state-pension-statement. Bear in mind though that this forecast is based on a lot of assumptions, so don't take it as gospel. Indeed, for some people the forecast assumes they won't pay anything else in National Insurance between now and retirement, which is clearly ludicrous.

You may have the option to make an extra payment to cover any missing qualifying years and then receive a bigger pension or even the full "flat rate". This is effectively a gamble as to whether you'll live long enough to make back the extra payment though a higher state pension, so consider taking advice before making any decisions.