THE SINGLE TIER STATE PENSION FROM 2016

No doubt you have heard a lot about the Single Tier State Pension, which is due to come into force for all those who become entitled to their State Pension in the UK from April 2016. This article examines the main proposed changes, as the legislation passes through Parliament. Please bear in mind that this could change since the final details have not yet been announced.

Key points

  • What is the Single Tier State Pension?
  • How will it work?
  • Winners and losers under the new arrangements
  • Retiring soon? Get your free retirement checklist

What is the Single Tier State Pension?

The Single Tier State Pension is a major change in the way you will receive State pensions if you are entitled to receive your pension after April 2016. If you receive your State pension before this date then you will receive benefits under the old schemes. Click here to find out your State retirement date.

The main focus of the Single Tier State Pension is to simplify the State pensions arrangements into one scheme, rather then the multitude currently in existence.

How will the Single Tier State Pension work?

Here are the main details:

  • £144 per week (taxable) in 2013 terms.
  • The current ‘triple lock’, which guarantees that the State pension will rise at the minimum of earnings, inflation or 2.5% has only been guaranteed during the lifetime of this Parliament (i.e. to May 2015).
  • You will need to pay in a minimum of 10 years National Insurance to get the Single Tier State Pension (currently there is no minimum).
  • You will need to pay National Insurance for 35 years to get the full £144 per week (currently around 85% of people)
  • You will only be able to use your own National Insurance record to benefit from the new Single Tier State Pension. Currently you can use your spouse’s record in certain circumstances. There are to be transitional arrangements which should mean that if you have currently taken your spouse’s or former spouse’s National Insurance contributions into account you should not lose out. You will be able to top up previous contributions to qualify for a full pension.
  • You can defer the Single Tier State Pension, but under less favourable terms. Currently you get around 10% extra pension for every year of deferral. Under the Single Tier State Pension you will only get 5.2% of extra pension for every year of deferral. You will not be able to get a lump sum if you defer your State pension under the new system.

Winners and losers under the Single Tier State Pension

Neutral

  • Existing pensioners
    You will not get any more or less under the new system.

Winners under the Single Tier State Pension

  • Public Sector workers
    Most public sector pensions are contracted out of the second State pension. The new legislation guarantees that your pensions cannot be changed for 25 years. This means you are likely to benefit from the changes.
  • Those who took a career break
    Many people who looked after children had a reduced National Insurance contributions record under the old schemes. You are likely to benefit from the Single Tier State Pension.
  • Self-employed
    The Self-employed did not do well out of the old State pension since they did not get the Second State pennsion. you will benefit from the Single Tier State Pension.
  • Low earners
    Low earners often received less under the Second State pension. You will benefit from the Single Tier State Pension.

Losers under the Single Tier State Pension

  • Private sector final salary scheme members
    It is likely that your employer will look to recoup the additional 3.4% National Insurance they will incur as a result of the abolision of contracting out of the second State pension. This could mean reduced pay rises, redundancies, or reduced pension benefits.
  • Public sector employers
    Public sector employers are faced with a similar 3.4% rise in National Insurance asa result of the abolotion of contracting out of the second State pension. They will need to raise extra money or reduce costs – perhaps a Council Tax rise is on the cards?
  • Those with less than 10 years payment into National Insurance
    If you paid in for 9 years under the current schemes you would be entitled to £32.24 per week. This would reduce to zero in the same scenario after April 2016. You will be allowed to top up previous contributions to allow you to qualify for a pension under the new rules.
  • High earners
    High earners traditionally pay more into the second State pension. the maximum State pension could be as high as £250 per week under the current schemes, reducing to £144 per week under the Single Tier State Pension.

What to do if you are retiring soon

We have created a handy free resource if you are retiring soon – the retirement checklist. This gives you the top 10 tools you need to know to claim the maximum retirement income. Just complete the form below to claim your checklist.

What do you think of the new Single Tier State Pension? Let us know your thoughts in the comments below.

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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