NEW STATE PENSION FROM 2016
This article explains how the new State Pension works following changes made 6th April 2016. The changes do not affect you if you were already claiming the State Pension before that date. This change is important to you if you are approaching State Pension age, and particularly so if you are a woman, have been self-employed, or have contracted out of SERPS/S2P in the past.
- All new State Pension claimants will receive benefits under the new rules
- How the new State Pension works
- How benefits accrued before 2016 are dealt with
- How to find out what you’ll get under the new State Pension
- How to claim your State Pension
- Winners and losers under the new State Pension
- What to do if you plan to retire soon
New State Pension – what has changed?
The old State Pension was very complicated. The new State Pension aims to simplify the payment structure into one flat rate scheme. The old scheme had various elements, but was made up of the Basic State Pension, plus a top-up based on your earnings-related National Insurance contributions. For the top-up scheme, the more you paid in, the greater your pension. From now on, these 2 elements of the State Pension will be merged together so that you will only receive one flat rate, based on the number of years you contributed.
How the new State Pension works
State Pension age
You can claim your new State Pension once you reach State Pension Age. This date depends on when you were born, and is not the same for everyone. You can claim the new State Pension for:
- Men born on or after 6th April 1951
- Women born on or after 6th April 1953
The easiest way to check your State Pension age is to use this State Pension age calculator.
National insurance contributions
To qualify for the new State Pension you must pay National Insurance contributions for a minimum of 10 years. If you pay National Insurance for fewer than 10 years, you get nothing under the new rules (the Government estimates this currently affects 1% of men, and 2% of women).
The maximum State Pension is payable after 35 years of contributions (an increase from 30 years under the previous rules), but you do not get more if you pay in for a longer period. If you pay more than 10 years of National Insurance contributions, but less than 35 years, you will get a lower amount from the new State Pension . You stop paying National Insurance after State Pension age.
If you had a period where you did not work, you may have collected National Insurance credits (due to unemployment, sickness, looking after children, or acting as a carer). Alternatively, you may have paid voluntary contributions to catch up any missed years.
Maximum new State Pension
The new State Pension pays a maximum flat rate of £175.20 per week (£9,110.40 per year).
Tax on your State Pension
The State Pension is part of your taxable income, but is not taxed, which means that your other income sources may be taxed instead.
Other income after you claim your State Pension
You can continue to work after State Pension age. Your State Pension is not affected by other pensions, such as workplace pensions.
How the old State Pension works alongside the new scheme
Your previous National Insurance contributions under the previous State Pension rules count towards the new State Pension. However, transitional arrangements are in place to ensure that people are treated fairly. As you can imagine, this makes the calculation of your State Pension very complex.
The National Insurance Contributions Office will work out how much State Pension you were entitled to under the previous rules. This is called your ‘starting amount’. Your starting amount will be the higher of:
- The amount you would have received under the old rules; or
- The amount you would get if the new State Pension had been in place at the start of your working life.
The starting amount will include a deduction if your workplace pension scheme contracted out of the additional top up pension, in return for paying less tax. You are more likely to be affected by this rule if you work in the public sector. Many private workplace pensions also contracted out of SERPS/S2P in the past.
All this means that you should not get less under the new State Pension than you would have been entitled to receive under the old rules.
If your starting amount is less than the full new State Pension, you can top this up by making voluntary National Insurance contributions.
If your starting amount is more than the full new State Pension then this amount will be protected. This additional amount will also increase in line with inflation each year.
How to find out what you will get under the new State Pension
The calculation of your State Pension benefits is quite complicated. The only way to be sure of your entitlement is to apply for a State Pension statement. You can do this online, or send off a form.
Deferring the new State Pension
As under the old scheme, you can defer your State Pension if you do not need the income. If you defer your pension, the new State Pension is roughly half as generous as the old scheme. The new State Pension is boosted by 1% for every 9 weeks you defer taking payment. This works out to be a boost of 5.8% for every year you defer the State Pension. The old State Pension boosted your pension by around 10.4% for every year you deferred payment, so you can see the new scheme is less generous.
If you want to defer your State Pension you do not need to do anything. If you do not claim your State Pension it will automatically defer until you claim the payment. Just remember that if you die before the State Pension is paid, then the benefit will be lost.
Claiming your State Pension
You have to claim the State Pension. You should receive a letter 3 months before your State Pension age, which tells you all the ways to claim your State Pension. You can claim your State Pension online.
Winners and losers under the new State Pension
As the rules are complicated, this depends on your personal circumstances. Generally speaking, if you were born after 1980 you should do worse under the new rules. The Government data estimates that Over 80% of women and over 70% of men are notional retirement lifetime gainers in the first 15 years of the new State Pension.
- Women – winners
On average, many women earn less than men, mainly due to childcare responsibilities. If you worked part-time in the past, you may not have paid into the top-up State Pension. Therefore, you should get more under the new scheme. Of course, this is counterbalanced by the need to pay into the scheme for more years. According to the Government data, 39% of women who receive the State Pension in 2016 will benefit from the new rules. Only 19% of men will benefit.
- Self-employed – winners
The self-employed were not allowed to pay in to the top-up State Pension under the old rules. Therefore, they should benefit from the new State Pension.
- Younger workers – losers
If you are in your 20s or 30s you are likely to get back less from the new State Pension than under the old rules. The ultimate aim of the new State Pension rules is to save the Government money in the long term. The Pensions Policy Institute estimates that three-quarters of workers in their 20s may lose out by around £19,000 over a typical retirement period. They also estimates that two-thirds of workers in their 30s would lose out by an average of £17,000 over a typical retirement. However, some workers in their 20s and 30s might gain from the new scheme. Overall, the PPI estimates that over 11 million younger workers would get less under the new scheme. The Government data estimates that only 1% of the population who retire after 2040 will benefit from the new rules.
- Contracted out workers – unclear
If your workplace pension contracted out of SERPS or S2P you will have paid less National Insurance (this affects around 70% of workers). Therefore, your new State Pension will be adjusted to take account of this reduction as your workplace pension would have been boosted instead. Some contracted out workers will get less under the new scheme, but many will get more. According to the Government data, approximately 70% of contracted out workers will get more under the new State Pension, while around 25% will get less. Initially, around 80% of those who must pay more National Insurance under the new rules will get back more in long-term pension.
What to do if you plan to retire soon
If you are approaching retirement, you should start to review your various sources of income. Some of these will be guaranteed, but they may not all start at the same time. You need to do some careful planning to make sure you have enough income to cover your lifestyle expenses. Contact us to discuss your retirement plans.
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About 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.