Several important changes took place to the UK State Pension from 6th April 2016. One of Save & Invest’s in-house pension specialists, Caitlin Loynd, answers some frequently asked questions for our clients:
Q: Why is the State Pension changing at all?
A: The current "two tier" State Pension system is complicated. Based on 30 qualifying years of National Insurance, you could earn a Basic State Pension entitlement of up to £115.95pw (2016/2017). Atop this you may get the Additional State Pension based on earnings, although many “contracted out” of this through an employer or personal pension scheme.
Successive changes to this system by various governments made it very complex to understand and administer. The new State Pension rules will introduce a universal "flat rate" pension and the distinction between Basic and Additional State Pension entitlement will disappear.
A qualifying year is a tax year during which you are:
You will reach State Pension age under the new State Pension if you are a woman born after 5 April 1953 or a man born after 5 April 1951.
Q: How much will the new State Pension be?
A: The maximum new "flat rate" State Pension will be £155.65 (2016/2017 rate) for those retiring on or after 6th April 2016, based on 35 qualifying years of National Insurance contributions.
Q: Will I be worse off under the new State Pension rules?
A: In most cases, no. At 6th April 2016, the Pension Service did a "one off" comparison for everyone under both the old and new State Pension rules, based on their National Insurance records to that date.
If, up to 6th April 2016, you have earned a higher entitlement under the old rules you will keep that as your "foundation amount" for your State Pension. You may be eligible to earn more flat rate pension atop this foundation amount after 6th April 2016.
However going forward, higher earners may lose out as the flat rate pension will be less generous than the previous Additional State Pension (which was based on earnings).
Q: My State Pension forecast is already higher than the new maximum State Pension of £155.65. After 6th April 2016 will I earn more State Pension under the new scheme?
A: As noted above, your higher foundation amount will be preserved up to your State Pension Age in line with inflation (using the Consumer Price Index).
However, further National Insurance contributions will not secure any more State Pension.
Q: My State Pension Forecast shows a "contracting out" deduction. Why is that?
A: This reflects the fact that you were "contracted out" of the Additional State Pension within an employer’s pension scheme, or through a personal pension. Therefore a “contracting out” deduction will have been applied for the relevant period of National Insurance contributions.
Q: Why does the "contracting out" deduction still apply under the new State Pension? That doesn’t seem fair.
A: If you "contracted out" of the Additional State Pension you were still building up a pension entitlement through an employer or personal pension scheme.
Under the new State Pension the "contracting out" deduction still applies as otherwise you would effectively be getting two pension entitlements for the same stretch of National Insurance qualifying years.
Q: I have reached, or will have reached, my State Pension Age before 6th April 2016. Will the new State Pension changes affect me in any way?
A: Mostly no. You remain entitled to your State Pension under the current scheme rules, which includes more generous provision for being able to defer your State Pension.
But the new rules could affect what you could inherit as a State Pension from your spouse, depending on when they reach State Pension Age, in the event of death or divorce.
However if you reach your UK State Pension Age before 6th April 2016, you can purchase "top up" Additional State Pension for up to £25 per week, via special National Insurance lump sum contributions available only until 5th April 2017.
Please note that as this is only a general overview, the details of the changes are far more complex than can be covered here. You may need to contact the government’s Pension Service https://www.gov.uk/contact-pension-service for specific details as to how these changes could affect you, or please speak to your usual Financial Adviser.