Top up & take? / More State Pension Changes (Update)

11 February 2016

The issues surrounding the forthcoming changes to the State Pension in April 2016 have been highly topical….and in some cases controversial, in the way they are being applied.

With that noted, we make no apology for brushing off and updating a blog we first published in July 2014, which saw on the horizon what is now imminent. We believe that there is much pensions news to come out of the Chancellors forthcoming budget on March 16th 2016, although we do not believe any further significant changes will be made to the planned new State Pension starting on 06th April 2016 (not guaranteed).

This is reproduced below, with some updates to bring it up to speed ready for the changes due in a few weeks' time, just after Easter 2016.

We all know that as a demographic, we are living longer. To maintain our standards of living, many of us are also working longer, past the current State Pension age of 65 and beyond.

Whilst taxable earnings are available, some chose to defer their State Pension Benefits until they are needed. This in the past has been advantageous for most with an uplift in deferment of 10.4% pa for each full year deferred. The current standard full State Pension (in the tax year 2015/2016) is £115.95 per week (£6,029.40 pa gross) and you may also be entitled to additional State Pension benefits, such as State Earnings Related Pension (SERPS), Second State Pension (S2P) or a Graduated Pension.You may want to check your State Pension to ensure you are up to date you can use the State Pension Forecast service here:

The Government has recently announced that this deferral uplift in their State Pension will be cut by almost half. These changes are being brought in because we are all living longer, as noted, and the comparatively generous rate of increase to date will not be sustainable into the future.

The Pensions Minister at the time, Steve Webb, stated that when the new, single-tier State Pension system is introduced in April 2016 (now confirmed at a level of £155.65 per week (£8,093.80 pa gross)), people who choose to defer their State Pension beyond state pension age will only receive a 5.8% pa increase in their pension if they delay payments for a year. Just over half the current increase of 10.4% pa. Those in deferment before April 2016 and eligible to draw benefits would still be eligible to receive an ongoing uplift at the rate of 10.4% pa.

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 their choice. If we knew how long we would live, this would make the financial planning a lot easier, although I am sure it would have many other undesired effects!

In monetary terms under the new regime for State Pensions , an individual receiving the full flat-rate State Pension of £155.65 a week (£8,093 per year) would see an increase in their total annual benefits of only £469.39 if they defer for a year. The good news is that anyone who reaches State Pension Age before 6 April 2016 can still get the 10.4% rate of increase if they choose to defer taking benefits. It's disappointing news, though, for anyone who will retire after that date and had planned to delay their State Pension.

Deferral may still be a sensible move for someone in very good health who intends to carry on working, or who has substantial pension income from other sources. However, for the majority of retirees after April 2016, it may well be a case of 'top-up and take' – checking that you have accrued the number of years required to qualify for the full basic State Pension and, if you haven't, make a lump-sum payment to rectify the situation – and then start taking benefits.

The ability to top-up the State Pension (voluntary Class 3A National Insurance Contributions) will currently become available (from October 2015) to those close to and over state pension age and full details can be found here:

Chapters Financial is not responsible for the content of external webpages.

It would be worthwhile checking that any voluntary contribution offers the potential for value before proceeding to join in the new initiative.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pension's legislation on your finances. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse FPFS

Chartered Financial Planner

CFP Chartered FCSI

ISO 222222 Certified

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