The Chancellor spends billions each year a year of the state pension. And as more of us are living longer, that bill is set to rise. It’s hardly surprising that reforming state pensions has been a top priority for him.
He has come up with a radical set of reforms for the state pension, that aim to sweep away the complications that have built up over the years, and replace them with a new fairer scheme that is easier to understand. Unfortunately, things don’t seem to have quite worked out as planned.
Fairer pensions for all?
The old basic UK state pension and state second pension (SERPS) will be replaced by a new, simpler single-tier pension. People who’ve reached state retirement age have their pension upped to £155.65 a week from 6 April 2016.
The reforms sound fairer, with the same pension rate for all. Unfortunately, when you look at the details, things may be even more complicated than before.
It has been estimated that only around a third of all people who are ready to claim their state pension will receive the maximum payout.
To get the full state pension, you will need to have paid in at least 35 years of National Insurance contributions. If you have taken time away from the workplace to have a family, or if you have been contracted out of SERPS, you may not have made enough contributions, and will receive only a reduced pension.
This is worrying, and the obvious question to ask is how much you will actually get. This depends on the complicated set of calculations the Government will use to determine your new state pension entitlement.
How the calculations work
Under the new state pension, you need 35 years of contributions to get £151.25 a week. You lose one 35th of that total — £4.32 — for every year you missed on contributing.
If you never contracted out of SERPS, the calculations stop there. But if you contracted out — as millions did — the Government makes a further calculation to work out how much income it thinks you’re getting from the money you built up in the extra private pension you took out instead of SERPS – whether or not you actually did.
Everyone will need their own calculation, and many people will find their actual pension payment is much smaller than they were hoping.
How can you find out what you will get?
You can request a State Pension statement from the Department of Work and Pensions. It will give you an estimate of how much State Pension you may get based on your National Insurance contribution record on the date the statement is produced. It’s not a guarantee of what you will actually get, but it should help you to start making plans.
You can find out more about getting a State Pension Statement here
Even if retirement is still far away, you should complete the form to find out how much pension you will get as soon as possible. The sooner you discover your state pension entitlement will leave you with a shortfall, the more you can do about it.
If you have less than 35 years of National Insurance contributions you will be able to top them up. Each year you add to your National Insurance record after 5 April 2016 would add around £4.44 a week, (£155.65 divided by 35) or about £225 a year in pension income, and with the state pension linked to inflation, the returns should rise each year.
Putting off drawing the state pension can boost your income in the future. Deferring for just one year can make you more than £10,000 richer over the average pension term.
Of course, if you do not currently have a private pension you should consider arranging one – or looking into other ways to save for the future – like the new Lifetime ISA.
What should you do?
Arranging a comfortable retirement has always meant careful planning. With the changes to the state pension getting expert individual advice is even more essential. Our professional retirement team will be happy to help.
Click here to read our recent blog “When Can I Retire?”
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