Younger pensioners receive £11,000 extra over a 20-year retirement than older ones

The state pension is the foundation of many people’s finances when they retire — and after a lifetime of paying National Insurance contributions, it’s no wonder retirees expect their dues.

But an overly complex system means it can be difficult to know exactly how much you’re getting. Millions of people are not receiving the “full” advertised payouts, despite diligently paying all required National Insurance contributions throughout their working lives.

There is no guaranteed flat rate, but how much you get depends on factors such as your age, how long you have worked and your type of work.

How the AOW works

There are two main forms of AOW: the ‘basic’ AOW, which is paid to those who reached retirement age before 6 April 2016; and the ‘new’ AOW, for those who reach it after that date.

The basic pension, also known as the ‘old’ state pension, pays a maximum of £141.85 per week, or £7,376 per year.

The new state pension, received by men born on or after April 6, 1951, and women born on or after April 6, 1953, pays a flat rate of up to £185.15 per week, equivalent to £9,628 per annum.

Both the basic pension and the new state pension are increased each year in line with the highest inflation rate, income growth or 2.5 percent, under a mechanism called the triple lock. In April of this year, payments will increase by 10.1 percent – the inflation of last September.

The basic pension increases by £14.35 per week to £156.20, while the new state pension increases by £18.70 to £203.85.

The difference between the two payments will increase to £47.65 per week or £2,478 per year. Over the course of a 20-year pension, that amounts to a whopping £49,560 difference between the two state pension rates.

So why are they different, and does this mean older retirees are worse off when they retire?

Rough deal for older pensions

New rules introduced six years ago mean there is now a two-tier state pension system in Britain.

While there is a significant difference between the two state pensions, the average payouts to older and younger retirees are actually much closer.

Many people with the old state pension were entitled to an income-related supplementary element.

Millions receive this extra pension, known as ‘Serps’ (means-tested pension plan), on top of their basic payment.

The state pension plus a top-up means-tested pension means people on the old state pension currently earn an average of £162.92 a week, according to figures from the Office for National Statistics.

By comparison, those on the new state pension receive an average of £173.60 per week. (This is because you need 35 years of National Insurance credits to qualify for the full ‘flat rate’.) On average, retirees born before 1953 receive £10.68 less per week than more recent retirees.

This works out to a difference of £11,000 over a 20-year pension.

The gap is only widening

Experts warn that this gap will widen as high inflation pushes the new state pension in pounds and pence more than the lower old rate.

However, there is another element of the old AOW amount that is not included in these calculations.

Millions of people have spent at least a year on an “outsourced” pension, which is intended to replace part of their state pension.

Those who were outsourced by their employer paid less national insurance contributions and the money went to a company pension scheme.

As a result, they may receive less AOW, but more overall if income from those workplace schemes is included. The outsourcing ended in 2016.

Is it an unfair inheritance for some?

Steve Webb, who was the architect of the new state pension between 2010 and 2015, says there are winners and losers in the change.

Sir Steve, now a partner at consultancy LCP, says: ‘The new AOW will cost the government about the same as the old one, but there are groups that are doing a little better because of the change and others a little worse. ‘

For example, the new AOW system is designed to help women, who usually retire with a lower pension.

The amount paid out under the old system was partly linked to wages, and because women historically earned less than men and had fewer years of paid work, they received less supplementary state pension.

The new AOW pension is only linked to years of NI contributions.

The new system also awards more NI points for time at home with kids or caring responsibilities, which has boosted women’s payouts. But this means that women with the old state pension continue to lag behind compared to those born a few years later.

Another group of workers left behind by the reforms are the self-employed. This is because they do not receive an AOW benefit through an employer.

Most former self-employed persons on the old state pension therefore receive the basic level of £141.85 per week, while younger self-employed persons in retirement receive the full new state pension at £185.15 per week.

Baroness Ros Altmann, also former Minister for Pensions, says: ‘The self-employed are a large group that has been hit hard – and that’s unfair.

‘Unfortunately there is no legal protection for them on the grounds of age discrimination, because the state pension is paid at the discretion of the Secretary of State.’

On the other hand, some people have been left out of pocket under the new system.

On average, higher-income men receive less than before, because the new pension is paid at a fixed rate, explains Sir Steve. Men who have reached state pension age after 2016 receive, on average, a lower amount than their older peers.

Within a decade, women could receive a higher state pension than men under the new system, adds Sir Steve.

j.beard@dailymail.co.uk