Pensions shake up. How does it affect you?

There are planned changes for state pensions from April 6^th 2016, so I thought it helpful to explain what they are so you can consider the impact on you. While I am a few years off retirement I know it is good to be aware and informed now.

In my previous blog I explored the possibility of having a rental to support your retirement portfolio. This got me thinking about how little I actually know of the state pension system. In my research I discovered some wide-reaching changes are afoot. Are you ready? Do you need to be ready? You decide.

The Very Basics

We have to start somewhere.  The state pension age (SPA) is 65 for men and for women it is in the process of moving from 60 to 65 (by November 2018), currently 62. Well, it keeps increasing:

• By 6^th October 2020 it will be 66 for both
• By 6^th April 2028 it will be 67, and
• Between 2044 and 2046 to 68.

Your state pension is based on your National Insurance (NI) contributions and if you have 30 years contribution you will receive £115.95 per week (if single). Double it to £231.90 a week if married and both built up their state pension. If you have made less NI contributions your state pension is pro-rated.

If you have low income you can supplement your pension with pension credits (read more on it here).

Also, you may qualify for an additional state pension, known as State Earnings Related Pension Scheme (Serps) or state second pension (S2P).  Based on your earnings you could claim an additional £163 a week on top of your basic state pension. It is also known as ‘contracting out’.

Lastly, if you defer from claiming your state pension and keep working after your SPA then your pension currently goes up 10.4% per year.

What is changing?

I have only covered the basics above as the pension system is more complicated than this. Many agree and that is why a number of changes are about to come into effect. Let’s run through them.

Firstly, a new flat-rate of £155.65 a week is to replace the basic AND additional state pensions from 6^th April 2016. Who is affected… a woman born on or after 6 April 1953 and any man born on or after 6 April 1951. So no contracting out (Additional state pensions) and you’ll have to pay more NI contributions.

Next, there is an increase in the qualifying NI contribution years from 30 to 35. But what is good is for those who take a career break to raise a family, or caring for relatives or children, or low-paid, as this can now be counted towards the 35 years of NI contributions.

However, if you have less than 10 years NI contribution you won’t qualify. It use to be one year of NI Contributions to qualify, now it is a minimum of 10 (ten).

Remember that option to defer receiving your state pension? You can still do it however the pension will only go up 5.8%, not the previous 10.4% per year. A less attractive option.

Lastly, for housewives and stay-at-home mums who were entitled to a share of their husband’s pension (while having paid little or no NI contributions) this has been removed. Everyone, needs to build up their own NI record. There is some reprieve as they can still receive 60% of their husband’s pension if they have paid at least one year of married women’s stamp before reaching state pension age.

Who wins, who loses?

The following tend to be better off under the new system:

• those self-employed people who didn’t qualify for state second pension (like me!)
• those who have time to build up years of full National Insurance (NI) contributions
• those who haven’t built up an additional state pension, like women, carers and the low paid, and
• those who contracted out and can access their private pensions at age 55

While people in these groups tend to be worse (or no better) off:

• those with less than 10 years of NI qualifying years, alongside those with more than 35 years’ of NI contributions
• those high-earners and young employees who won’t be able to build up more additional state pension (ASP), and
• spouses, civil partners, widows and widowers who will no longer be able to claim or inherit a state pension based on a partner’s NI contributions

What should I do?

If you are retiring before April 2016 then you can top-up your state pension by making a lump sum (more here)

For everyone else, get a forecast of what you can expect to receive in terms of your state pension based on your National Insurance Contribution (click here).

Determine if you should make Class 3 Voluntary National Insurance Contributions. If you have a shortfall in your basic state pension you can pay to fill the gaps (usually pertaining to the last 6 years).

Use a calculator to determine the level of pension you could receive when you retire, it can combine the state pension with your own private pension / alternative retirement income to see how well off you are going to be.

If all else fails, contact the Pensions Advisory Service  for any support, or seek guidance from a FCA advisor.

I hope you have found this blog helpful.

Last updated by Nigel Brokenshire at March 23, 2016.