A simple summary of the state pension and the 2016 changes

March 6, 2015

This month, we’re aiming to take the headache out of pensions, so we’re starting with the basics. A series of short posts will explain some of the main types of pension in more detail, starting with the State Pension.

So what is the State Pension?

The State Pension is a regular payment from the government most people can claim when they reach State Pension age. There is new State Pension scheme coming into effect in April 2016.

What is State Pension age?

State Pension age depends on the year you were born. Basically, we’re all living and working longer, so State Pension age is gradually being pushed up. The younger you are now, the longer you’ll have to work before you’re entitled to the State Pension. See, being young isn’t ALL good news!

You can check your State Pension age on GOV.UK

You don’t have to start claiming your State Pension as soon as you reach State Pension age. You can defer it to get extra pension when you do claim. This extra pension can be paid either as an increase in your weekly rate when you do start to claim, or you can get it as a one-off lump sum.

What if I carry on working past State Pension age?

You can choose to continue working past State Pension age, while claiming your State Pension. Any money you earn won’t affect your State Pension.

How does the State Pension work?

The amount of State Pension you get depends on the number of years of National Insurance (NI) contributions you’ve made throughout your life. This includes both contributions you pay when working and any contributions credited to you when you’ve been unable to work. If you’ve paid/been credited enough NI contributions by the time you reach State Pension age, you’ll be entitled to the State Pension.

If you don’t have enough qualifying years of National Insurance contributions to qualify for the full State Pension, you might be able to fill in the gap by paying voluntary contributions, although there is a time limit for doing this.

How much will I get under the State Pension?

From April 2015, the full basic State Pension is £115.95 per week. From April 2016, it will be at least £148.40 per week (to be confirmed in autumn 2015). Depending on your National Insurance record, you may receive more or less.

As you can see, this figure changes over time. As a guide, the basic State Pension will increase each April in line with the annual rise in earnings, the Consumer Price Index or 2.5%, depending on which is the highest.

So unless you’re very good at predicting the future and/or really good at maths, it’s very difficult to know what this figure might look like by the time you reach State Pension age, particularly if that’s some way off.

What about the Second State Pension?

Also known as S2P or additional State Pension (and previously SERPS), this is paid automatically on top of your basic State Pension. However, you may not qualify for this if, for example, you were also in a workplace pension scheme that was ‘contracted out’ of this part of the State Pension. This is being abolished under the new State Pension scheme in April 2016.

How is the State Pension changing?

Are you a man born on or after 6 April 1951 or a woman born on or after 6 April 1953? If so, you’ll be affected by forthcoming changes to the State Pension.

The government is attempting to make the system simpler by scrapping things like the State Second Pension and focusing on one flat rate.

Here’s how it will work:

Under the old system, you need 30 qualifying years of National Insurance contributions to get full basic State Pension. You can get less than the full amount if you don’t have 30 qualifying years (for example, if you’ve paid NI for 18 years you will get 18/30ths of the full amount).

Under the new system:

1)      If all your contributions are paid or credited on or after 6 April 2016: you’ll need 35 qualifying years of contributions to get the full State Pension. You’ll need at least ten qualifying years to see anything at all.

An example:

If you have 25 qualifying years on your National Insurance record, multiply 25 years by £4.24 (£148.40 (the full weekly State Pension from April 2016) divided by 35 (qualifying years for full amount))…Your State Pension will be £106 per week.

2)      If some of your contributions are before 6 April 2016: the amount of pension you get for these contributions will be at least as much as you would have got under the old system provided you have at least ten qualifying years before 2016 (they don’t have to be consecutive years). If the pension figure ‘earned’ against your contributions pre-April 2016 is less than the new full state pension, you can add more qualifying years after 2016 until you reach the full new State Pension amount, or reach State Pension age (whichever’s first).

3)      You won’t usually be able to claim a pension based on contributions of your spouse or civil partner (although there are some exceptions).

4)      ‘Contracting out’, where you pay a lower rate of NI contributions because you’re contributing to a certain kind of pension scheme, will be abolished. If this applies to you, you’ll start paying the standard rate of NI from April 2016.

A State Pension top-up scheme is also being introduced from October 2015 for existing pensioners or those who will reach pension age before 6 April 2016. Under this scheme, you’ll be able to make a one-off National Insurance contribution to increase the amount of weekly pension you receive by up to £25. The amount you’ll need to pay depends on age (the older you are, the less you have to pay).

For example, to get an extra £1 of State Pension a week for life you would need to pay £890 if you are 65 and £674 if you are 75.

The State Pension top-up can be inherited by a surviving spouse or civil partner.

A word of warning about the new pensions systems

As with all these things designed to make our lives simpler, that’s not always the case. And certainly, until things get established, the new pensions system is no different. We’ve written before about some of the complications of the new system for those who have a private or workplace pension which is contracted out of some of the current state second pension (being integrated into the new flat scheme), so variations will still apply depending on your personal circumstances.

But if I’m essentially being given money for nothing, why do I need to bother with any other types of pension?

It’s safer to view the State Pension as a handy part of your retirement planning rather than the way you’ll fund your retirement. Yes, it’ll pay you a regular income. But, depending on your plans for retirement, it may well not be enough to meet all your financial needs. If you’re relying on this alone, there might not be much left each month for you to save towards the things you might be looking forward to, like luxury holidays, or for your long term care should you need help.

And there’s another VERY important factor to bear in mind. Many commentators have questioned whether the State Pension will exist at all 20 years from now. Potentially it might just be reserved for the under-privileged few. Everyone else will have to pay for their retirement through other provisions. So you really DO needs to bother with other types of pensions or you could really come unstuck.

In summary

  • A new State Pension arrives in April 2016
  • The minimum full pension payment will be £148.40 per week
  • To qualify for the full pension, you’ll require 35 qualifying years of National Insurance contributions
  • Questions remain over how long state pensions can realistically survive, so don’t rely on this alone!

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

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