Written evidence from Which? (USP0131)

Which? is the largest consumer organisation in the UK with more than 1.2 million members and supporters. We operate as an independent, a-political, social enterprise working for all consumers and funded solely by our commercial ventures. We receive no government money, public donations or other fundraising income. Which?’s mission is to make individuals as powerful as the organisations they have to deal with in their daily lives, by empowering them to make informed decisions and by campaigning to make people’s lives fairer, simpler and safer.

Which? welcomes the opportunity to submit evidence to the Work and Pensions Select Committee’s inquiry into understanding the new State Pension, ahead of its introduction in April 2016.

Communicating the changes to the new state pension

1. The state pension changes are designed to make things simpler. However, people may still face a complex picture while the system transitions. Which? recognises the importance of communicating the changes to the state pension so that people can fully understand how they will be affected. As such, we have published a significant amount of information on the issue, targeted at those most likely to be affected in the short term, and in particular people who are approaching retirement, as well as those who are already retired.

2. In the March 2014 edition of Which? magazine[1] we published an article that explains how the state pension changes will affect people. The article describes the impact of the reforms on those that will not retire until after April 2016, as well as how the proposals allow existing pensioners to boost their state pension. The article also attempts to show what exactly the changes will mean for someone’s pension in monetary terms, providing illustrations using different scenarios. We show how much state pension a 55-year-old man could receive under the current rules if he had been: contracted in to the additional state pension throughout his working life; contracted out; or self–employed, what he would receive under the new rules, and the difference.

3. Earlier this year, we asked almost 3,000 Which? members who were eligible to top up their state pension, how they felt about this scheme, and only three in 10 (30%) had heard of the ability to top up. However, 82% knew they could delay when they collect their state pension, and receive a bonus when they came to claim it.

4. As a result, in the September 2015 edition of Which? Money magazine we published an article that explains how the new top up scheme works. It also compares the benefits of topping up with the benefits of deferring, and provides some monetary illustrations to help consumers understand how much they might expect to receive when they reach state pension age. It covers common concerns such as how many years people have to survive to break even.

5. The new state pension is the cover story in the January 2016 edition of Which? Money magazine. The aim of the article is to once more fully explain the changes, help people to understand what they need to do to find out how much they might receive, and describe what the changes mean for those already claiming their state pension.

6. Which? has also produced a free consumer guide, The State Pension Explained[2], explaining how the new system will work and helping people to plan for their eventual payout. There are sections on how people can defer their state pension, and top up or boost their state pension. The guide also covers tax issues, as well as what happens to someone’s state pension when they die.

7. Finally, Which? has also produced an online guide, including a video explaining the state pension changes. The online guide contains a state pension age calculator and a section helping people to estimate how much they will receive under the system. The guide can be found at www.which.co.uk/money/retirement/guides/whats-happening-with-the-state-pension-in-2016. In the six months from April to September 2015 there were over 460,000 visitors to our online pensions content. Over 190,000 visited the State Pension Explained content.

8. There are still four months until the new state pension is introduced, and there is more work that could be done, in particular to focus communications at those aged over 55 who are approaching state pension age. In parallel, existing pensioners would welcome clarity over the impact the new state pension will have on them, with targeted communications and information about the top-up scheme for example. Looking further ahead, it is important that everyone who is saving for retirement has a good understanding of what to expect from their state pension, but this should be a longer term priority.

Issues people are facing in understanding the transition to the new state pension

9. State pension changes are a common subject of calls to the Which? Money Helpline. We hear concerns from members who are already retired, thinking that they are losing out if they are on a lower pension, or worried that their pension would come down to the starting amount. For those existing pensioners who have expressed concerns that the changes are unfair, leaving them behind on a lower state pension, we acknowledge that the Government has introduced Class 3A contribution top-ups.

10. Many people who are fairly close to retirement who have already built up more than the new flat rate will still get to keep it, but those a little younger who were on track to build up much higher state pension, and who have already completed the full number of qualifying years, are concerned that their future national insurance contributions are not going to help them build up a higher state pension after 2016.

11. Which? acknowledges that the new state pension is designed to be simpler and fairer but using language such as ‘simple’ and ‘straightforward’ does not resonate with people who are still faced with what remains a complex picture, on a financial topic with which they have little engagement or understanding.

12. Some of the initial language used to describe the new state pension has not been helpful. Using terms such as ‘flat-rate’ has led some people to understand that everyone will receive the same amount post-April 2016, when in reality two thirds of those currently working will not actually receive the headline amount. The public impression is that currently the maximum basic state pension someone can claim is £115 per week, but in 2016, everyone will get a flat-rate state pension of about £150. In fact, people could get more, or less, than this amount, and people have not been able to understand what the changes mean for them on an individual basis.

13. While it is important to acknowledge the positive change to a single tier state pension, the problem is that everyone who is currently working, but who will not reach state pension age until after 6 April 2016, will have already contributed to their state pension under the old system, and will continue to contribute under the new system. This means that for these people there is a lengthy transition period during which time their entitlement will be worked out using a complex combination of the old and new rules. More needs to be done to communicate how the changes will affect people during this transition period, and to explain the different factors that will influence the amount people can expect to receive.

14. Which? suggests that the basic principle of the state pension could be better explained in that its aim will be to provide a minimum level of income, but no more. Therefore, if anyone wishes to have more than this basic living standard, they need to save into a private pension.

15. It is important that anyone can find out how much state pension they have built up and know when they will reach state pension age. The new service offering state pension statements based on the new rules, launched in October 2014, is a welcome improvement, although it is currently only available to people over the age of 55. At the moment, people under the age of 55 can only get a statement based on the current system. Which? supports the wider roll out of this service as soon as possible.

16. Unfortunately, current state pension statements can be confusing. The version that goes to over 55s shows how much has been deducted from the new state pension amount for any periods you were contracted out, but does not show which years this covers. Neither version explains or shows how any further National Insurance contributions you make could affect your pension, and both only take contributions from complete tax years into account.

17. Which? is keen to ensure that the Department of Work and Pensions’ new online service for state pension statements is as useful and informative as people need it to be. Scheduled to be rolled out in early 2016, the new service will show a person’s contributions to date, with an estimate of what they can expect to get at state pension age if they continue to contribute, as well as personalised information about what they can do to boost their state pension. We would like to see the new service tested on consumers to ensure it delivers the clarity they expect.

18. People need a good understanding of what to expect from the new state pension to aid retirement planning and avoid confusion and shocks. As Which? has highlighted in previous submissions to the Committee, it is critical that people have all the information they need when making decisions at retirement. It is equally critical that people have this information so that they can pan adequately for saving for retirement. Which? believes that consumers should be given or be able to access all the right information via a simple, single communication that brings together all the key information they need to know about all their pensions. To deliver this, the Government should lead and coordinate the development of a comprehensive pension and savings dashboard that enables consumers to see all their pensions and savings in one place. This must include an individual’s state pension forecast as this is the base on which people will be building their pensions savings.