The State Pension – changes and options17 August 2015
It's important that you are aware of what you could get and of the fact that you could top this up if you're not currently entitled to the full basic State Pension. In addition, it is good to keep abreast of the changes that are planned to come into effect next tax year (2016/2017).
There are a lot of changes occurring (as you will see), so we make no apology for the length of this blog, which even for us is long! It is however an important subject and as we are all living longer, the topic will become ever more important as the pressure on the State Pension builds.
You will claim the new State Pension if you reach State Pension age on or after 06 April 2016. If you reach State Pension age before this, you'll get the State Pension under the current scheme instead.
For information, a link to the current terms can be found here: https://www.gov.uk/state-pension/what-youll-get
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What are the changes?
The State Pension is moving to a single-tier system in order to simplify the current situation, which is pretty complicated. At the moment, there is a basic State Pension of approximately £115 gross per week, and an additional State Pension (the state second pension – S2P – or you may have known it as the state earnings related pension scheme – SERPS). The amount of additional pension paid depends on what you've earned in the past. On top of this, if you qualify, you may get pension credits to top up your State Pension.
The new flat-rate State Pension is intended to remove these complexities and introduce a single-tier payment. However, as you will see below, there could be some pitfalls along the way…
How much will I get?
A key change is how much you could get when you reach State Pension age. At the moment, the full basic State Pension is around £115.95 gross per week (£6,029.40 pa) for a single person (so double this if you're married and both you and your partner have built up full State Pension entitlement). The Government has stated that the full new State Pension will be £155.65 gross per week from April 2016. For information, the income benefit is paid gross, but is taxable.
You may be able to claim a higher State Pension, both now and after the rules change, if you are entitled to an additional State Pension under current rules. However, if you were contracted out of the additional State Pension at times during your career, you may have paid lower National Insurance contributions and/or received a National Insurance rebate to fund your workplace/private pension. Therefore, the Government will introduce deductions to the new State Pension with the aim of striking a balance between those who have contracted out in the past and those who have always paid full National Insurance contributions without any rebates.Lost a pension?
If you can't find the details of a pension plan you used for contracting out, you can access the Government's tracing service to find the details and a link to this can be found here: https://www.gov.uk/find-lost-pension
Receiving a State Pension Statement
You can obtain a State Pension Statement which should tell you how long you were contracted out for (if at all) and how much the shortfall in your basic State Pension might be. The form can be downloaded here:
It is possible to top up your State Pension if you have a shortfall and details of how to do this are below.
What you will need to claim the full new basic State Pension?
You will need at least 10 qualifying years of National Insurance contributions to qualify for any State Pension under the new rules.
Under current rules, you need 30 qualifying years of National Insurance contributions or credits to draw the full basic State Pension.
People who contribute entirely into the new single-tier scheme (those who start work after April 2016) will receive a single amount of pension based on 35 qualifying years of National Insurance contributions. Those with fewer than 35 years at State Pension age will get a pro-rata amount. For information, the current accrual level to receive maximum benefit is 29 years. You can see that the increased benefit of higher income comes at a cost.
Again, it is important that you check your State Pension entitlement to find out how many qualifying years you have accumulated. There is an online calculator to help you work out how many more years of work would be required, and your State Pension Forecast will also tell you this. The State Pension calculator can be accessed here: https://www.gov.uk/calculate-state-pension (please note that unless you are already aged at least 55, you cannot yet use the system to calculate or request a statement based on the new rules. Until April 2016, the online system will produce calculations using the current rules).
Changes to uplift of benefits in deferral
Those who choose to defer taking their State Pension will see an increase in the pension they receive when they eventually choose to draw it. At present, if you delay payments for a year or more, the increase to the pension you receive would be 10.4% gross per annum. When the new State Pension system is introduced in April 2016, this will drop to approximately 5.8% gross per annum for those eligible for State Pension benefits after this time - quite a significant reduction.
As we have noted in previous blogs (http://www.chaptersfinancial.com/top-up-and-take-more-state-pension-changes.html), under the current rules, someone choosing to defer for one year would need to live for around another ten years to make the decision financially worthwhile. When the reduced rate of increase is introduced, you would have to live for about 19 years to benefit from the decision to defer.
This can be a complex area and the benefits of deferral very much depend on your view of your long-term health and circumstances. We would recommend that you seek independent advice before making your decision.
How can I top up my State Pension? And do I need to?
The best place to start is by checking your current State Pension entitlement, as detailed above.
If you find that you will have a shortfall when you reach State Pension age, you can pay voluntary National Insurance contributions to top up your State Pension. How you do this depends on your age.
If you are under State Pension age
You can usually pay voluntary National Insurance contributions for the current tax year, and for gaps in your National Insurance record from the past six years. Details of who can pay these voluntary contributions can be found here: https://www.gov.uk/voluntary-national-insurance-contributions/who-can-pay-voluntary-contributions
As noted above, the State Pension is a valuable source of guaranteed, index-linked income later in life and topping it up to the full amount could be very beneficial for many individuals, especially for those concerned about the future effects of inflation. However, as with any investment, it is important to consider the cash cost of buying this extra income and to compare it with other possible investments. It is also vital to consider your long-term health and whether it is likely that you will see a real gain over time from the additional income.
If you are close to or over State Pension age
If you are already drawing the State Pension – or will be entitled to do so before 06 April 2016 (in other words, women born before 6 April 1953 and men born before 6 April 1951) – you will be able to 'buy' between £1 and £25 a week of extra State Pension This scheme aims to compensate the millions of pensioners who will miss out on the new flat-rate State Pension.
The new scheme will be in addition to the current voluntary gap-filling system, but it's important that you check that you have full entitlement to the full basic State Pension before you subscribe to the new top-up scheme. This is because your money will buy you significantly greater benefits under the existing scheme – for example, a sum of £890 would currently buy a 65 year old £4.64 a week of extra basic State Pension, whereas under the new scheme the same sum would boost your income by just £1.
How much you'll need to contribute depends on how much extra pension you want to get each week and how old you are when you make the contribution.
For example, you are 68 years old in October 2015. You decide that you want an extra £5 per week (£260 a year) on top of your pension. The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5. Therefore, you'll make a lump sum payment of £4,135.
If you qualify, there is only a short window of opportunity to increase your State Pension under this new top-up scheme: the scheme will run for 18 months, from 12 October 2015 to 05 April 2017.
An online calculator is available at https://www.gov.uk/state-pension-topup . This will give you an idea of the cost and value of buying extra State Pension income at your current age.
As you can see, it is important to consider your own personal circumstances carefully before making a decision on whether to top up your State Pension. The team at Chapters Financial can help you with your review of your State Pension situation. Talk to us at our Guildford or Woking offices or email email@example.com.
Because each person is an individual, no individual advice is provided during the course of this blog.
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.
Vicky Fulcher DipPFS