The first year of change has passed, but what did it mean to you? State Pension Update

24 May 2017

You may remember that it is just over a year ago since the State Pension was overhauled at the beginning of the tax year 2016/2017. The 'fanfare' headline was that the equalised State Pension would be fairer and more importantly at a higher level than previously. The headline at the outset was about £150.00 per week, and in this tax year has settled out at a level of £159.55 per week. That's £8,296 per annum. The 'old style' State Pension offered a standard rate of £122.30 per week, but was often increased with other top-ups, such as SERPS (State Earnings Related Pension Scheme), Graduated State Pension and the like (which invariably is not now the case).

If you apply online for a forecast (and we recommend that most clients and enquirers do) you can check that your National Insurance Contribution record is sufficient to allow you the maximum State Pension when you reach State Pension age. You can check here: https://www.tax.service.gov.uk/check-your-state-pension

It is worth bearing in mind that an individual who does not have a National Insurance record before 06 April 2016 will need 35 qualifying years to get the full new State Pension (an increase of five years on the old State Pension system).

A significant concern, as noted in a recent newspaper article, is that it is estimated that only around 41% of those reaching the age at which they can draw State Pension benefits will be entitled to the full amount. This is confirmed here: http://www.express.co.uk/news/uk/792707/full-flatrate-state-pension-warning-millions-face-missing-out

There are also concerns for the future of the Government's 'triple lock' guarantee and its ongoing affordability.

You can see the full details of the State Pension here: https://www.gov.uk/state-pension/overview

A few headline reminders about the State Pension when you get close to receiving it:

  • The income is taxable but paid gross. Therefore, if you have income from another source, such as another pension, HMRC is likely to increase the tax on this more to compensate for the State Pension you receive.
  • Under the 'triple lock' guarantee, the increase in the State Pension is based each year on the higher of the increase in the Consumer Prices Index (CPI), the average growth in wages or 2.5%. This year the increase is 2.5%.
  • If your State Pension is paid under the new system (you were eligible for your State Pension after 04/2016) you cannot take any deferred income as a taxable lump sum after the first year. This used to be the case, but no longer. Obviously, legislation can and does change and there have been official recommendations that this option should be restored, but this is currently not the case. As a note, we were not usually keen on the cash lump sum option, although each client circumstance is different.
  • If you defer your State Pension after the normal date it is due, you will receive an uplift of 5.8% gross pa for a full year (the increase used to be at a rate of 10.4% gross pa before the changes).
  • There was a period during which those who were entitled to a UK State Pension and reached State Pension age before 06 April 2016 could top up the State Pension with a capital sum, however this scheme closed on 05 April 2017.
  • The age you receive the pension benefit (and your free bus pass) is increasing and you can check what age yours is due here: https://www.gov.uk/state-pension-age/y

Summary

You can see that although the State Pension was intended to get simpler, for many it will actually be later in payment, more complicated and for some who do not have the full qualifying contribution record, more frustrating. This is the reason that we advocate an early check to see where you are and possibly if any changes can be made to maximise this valuable increasing income.

Pension planning has never been more important as we live longer and possibly need more income in later life due to issues such as long term care. There is no individual advice in this blog; however, talk to the team at Chapters Financial in Guildford for your retirement income planning.

Vicky Fulcher Dip PFS
Associate Director

Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.