As is becoming increasingly prominent in the Press, the State Pension is changing.
For those retiring after 6th April 2016, males born after 6th April 1951 and females born post 6th April 1953 you will be eligible for the full new State Pension of £151.25 per week; this amount maybe subject to change in the autumn of 2015. The amount of State Pension that you will be entitled to receive will be driven by your National Insurance (NI) record of contributions. Ten years is the minimum to receive a proportion of the full pension, 35 years is the maximum.
Just because you are entitled to the State Pension, does not mean that you need to claim the benefit. The new State Pension can be deferred, an extra amount, which may be taxable, could become available once you have delayed payments for at least 9 weeks. The State Pension will increase by 1% for every 9 weeks you defer the payment. This works out to approximately 5.8% for a full year of deferral. Those with a keen eye for detail will notice that deferral post 6th April is less generous than the current system (10.4% per year). In addition, the new State Pension does not permit a lump sum deferral payment.
Of course, if you are claiming the State Pension post 6th April 2016, you will be making use of your historic NI contribution record. Rest assured your NI record before 6th April 2016 will count towards the new State Pension. Your NI record prior to 6th April 2016 will be used to assess your “starting amount”. The starting amount is a part of your new State Pension. If the current system (pre 6th April 2016) delivers a higher State Pension, you will receive this amount. If the new State Pension provides an improved pension you will receive this benefit (as if the new State Pension system had been in place at beginning of your working life). Your starting pension will be reduced if you had periods of time during your working life when you were Contracted Out of the Additional State Pension (only relevant for some employed individuals).
For those whose starting pension is more than the new State Pension, the £151.25 per week mentioned above, these individuals will have an entitlement known as a “protected payment”. The difference between the protected payment and the new State Pension will be paid out as an entitlement and will be inflation proofed.
If you are reaching State Pension age in more than 30 days time (all 6th April 2016 State Pensioners) or you are over age 55 years you can complete a BR19 form or call the Future Pension Centre helpline, 0345 3000 168 to obtain a forecast of your benefits.
So the message is that whilst change is coming to the State Pension system, in theory, you should be no worse off post 6th April 2016.
But, don’t believe what you’re told!
The Institute of Fiscal Studies state in their report, A Single Tier Pension that most people would have to live to over 100 to be better off under the new system.
The changes outlined above are based on the new State Pension, a single tier approach to providing pension provision. The current State Pension is a two tier system, (for employees), made up of the Basic State Pension and an Additional State Pension; under various guises such as the Graduated Pension, SERPS, S2P, to name a few. Overtime, employees may have moved both in and out of the Additional State Pension, a concept known as contracting out (or in). This Additional State Pension is often very generous; will this be captured under the new single tier State Pension regime? Ros Altmann, the Pension Minister, describes the current State Pension system as being “an enormously complicated area”. The objective of the current Government promotional campaign to the public is to outline the basis changes (detail can follow!).
It’s interesting to note that The National Audit Office has requested that the Department for Work and Pensions (DWP) provide examples in their literature when individuals might be worse off under the new system. There is a suggestion that those who in the past have contracted out of the State Second Pension, via a Guaranteed Minimum Pension, may not be entitled to the escalation that is currently enjoyed via pension legislation.
To summarise
The official message is that whilst change is coming, in theory, you should be no worse off. As always, it’s worth checking the small print.
