It isn’t just private pensions that are set to change radically in the near future. The State Pension is changing too, with a new version becoming available from 6 April 2016. So if you’re approaching retirement you’ll want to be clear about what’s happening.
The new State Pension is intended to be simpler and fairer than the system it replaces, but some people could be worse off as a result. On the other hand, you may find that you can improve your overall financial position in retirement by deferring the point at which you start taking your State Pension.
It all depends on your personal circumstances and priorities. Your overall position may also be affected by how you intend to take advantage of the new rules on private pensions Nevertheless, by understanding the basics you should feel more confident about how to start narrowing down your options.
What’s changing and how will the new State Pension work?
The new State Pension does away with the old system in which the amount you’d get depended on your eligibility for ‘Basic’ and ‘Additional’ amounts. It’ll now pay a flat rate to anyone who reaches the State Pension age on or after 6 April 2016 (i.e. to women born on or after 6 April 1953 and men born on or after 6 April 1951).
It will be worth at least £148.40 a week, up from £113.10 per week today (the final figure will be announced in autumn 2015). To get the new full amount you’ll need to have made 35 years’ worth of National Insurance contributions (NICs) during your working life, compared with just 30 today. If you’ve made fewer contributions then you may get proportionately less. It’s also possible to increase your State Pension by paying voluntary NICs.
To get anything you need to have made NICs for at least 10 years, compared with just one year today. Any contributions you made before 6 April 2016 will be used to calculate a ‘starting amount’, which will be equivalent to the higher of the following:
- what you’d have received with the same NICs under the current system; or
- what you’d have received if the new State Pension had been in place at the start of your working life.
Other significant changes include:
- An end to the lower rate applicable to couples, as each individual will now receive the flat-rate based on their own circumstances.
- The age at which you can claim the State Pension will gradually rise after December 2018.
You can find full details of the State Pension changes on the UK Government website, here.
What could reduce the amount you receive?
Your new starting amount may include a deduction if you were in a workplace, personal or stakeholder pension scheme before 6 April 2012 or an earnings-related work scheme before 6 April 2016. This could mean you were ‘contracted out’ of the Additional State Pension and paid lower NICs as a result. Most people who have been in work will be affected, especially public-sector employees.
What could increase the amount you receive?
If you don’t need it immediately to support your living costs, you may want to defer the new State Pension, enabling you to receive a higher amount when you do claim. Details are yet to be confirmed but the government estimates your pension is likely to increase by 1% for every nine weeks of deferral – or almost 5.8% per year. If you qualified for £148.40 per week, then by deferring for one year you’d gain an extra £446 before any taxes that might be due.
If you’re already a pensioner or reach State Pension Age before 6 April next year, you’ll remain in the current system but could benefit from a top-up scheme to run for 18 months from October 2015. This will allow you to pay voluntary NICs in order to boost your additional State Pension by up to £25 a week. However, anybody considering this should carefully compare the contribution costs with the likely rise in their pension income.
How can I work out the best course of action for me?
As a first step, you should get an estimate of what you’ll receive as a State Pension at your intended retirement age. You can do this free of charge, either online or post, at the Future Pension Centre.
You may also wish to talk to a financial adviser, as they’ll be able to discuss your State Pension in the context of your overall retirement strategy, including tax planning. It’s worth bearing in mind, for example, that pension income is taxable at your marginal rate while withdrawals from an Individual Savings Account (ISA) are not; so you may find that you’re better off deferring your State Pension for a few years and paying for everyday expenses using an ISA in the meantime – although this will depend on your personal circumstances.
If you don’t yet have a financial adviser but are interested in finding one then you can find out more here.