Changes to the State Pension: are you a winner or a loser?
The State Pension is a universal benefit introduced in 1909 to prevent poverty in old age. In 2016 the State Pension will be radically overhauled.
Currently, anyone reaching retirement is eligible for the state pension of £113.10 a week and can top up a second State Pension with extra National Insurance contributions. This about to change.
Change has come about because there is a pension crisis in Britain.
The current State Pension doesn’t reflect life expectancy rising, the cost of living increasing and people having little to spare to top up savings for retirement. Today, many pensioners relying solely on the State Pension are struggling to make ends meet.
In light of the current pension crisis and increase in pensioner poverty the Government reviewed the State Pension and opted for a single tiered State Pension that is intended to be simpler and fairer.
How do you qualify for the new state pension?
Your new State Pension is based on your National Insurance record and all contributions and credits made before and after 6 April 2016.
What are the changes to the State Pension starting in 2016?
If you reach State Pension age in 2016 or after with a minimum of 35 years National Insurance contributions you’ll receive a flat rate, weekly payment of £145.40, at today’s prices.
If you’ve missed some annual payments don’t despair you can top up any you have missed to complete the 35 years.
Further changes include:
- Increase to 35 years of NI contributions: To qualify you will need 35 years’ of National Insurance contributions increased from 30 years.
- Means testing ends: The current enquiry into benefits and savings is complex and deters pensioners from making claims.
- State Second Pension (S2P or SERPS) abolished for new pensioners: Second pension’ and other top-up arrangements will be swept away under the reforms.
Any contributions you’ve made to your Second State Pension are safe but you’re not allowed any additional contributions beyond 2016.
- State Pension Entitlement is increased to 10 years. To build up your entitlement a minimum of 10 years NI contributions is now essential. Payments will be on a pro-rata basis.
- Contracting out ends: Phasing out has already started and it will end entirely in 2016.
- New retirement ages and gender differences phased out: 66 for both sexes in 2020 and 67 by 2028.
- Self-employed currently can only claim a maximum state pension of £113.10 a week but this will rise to around £144 from 2016 for those who have paid NI for 35 or more years.
- The lowest earners will see their basic entitlement rise.
- Married couples will each qualify as individuals rather than sharing the lower joint rate.
- Parents taking career breaks for the years spent looking after the family will be counted towards the 35 years of NI contributions.
- Some women and public sector workers – currently only entitled to the basic state pension or less.
- High earners: Abolishing the second state pension (S2P) and other top ups reduces the ability to maximise the State Pension from £250 per week to no more than the flat rate of £144 (in today’s money).
- Some married people relying on spouse’s income and their years of National Insurance contributions.
- Widows and divorcees will no longer be entitled to inherit the spouse’s state pension.
- Final salary scheme members will face higher NI contributions, around an extra 1.4%, or even see their scheme ending as employers will no longer receive an NI rebate.
- Anyone retired before April 2017: If you retire before April 2017 you receive a pension under the existing system.
- The young: Ineligible until aged over 70 and worse off because they’re unable to top up a second state pension.
Are you a winner or a loser?
The winners: gaining extra income in retirement
The Losers: losing income in retirement
The changes in the state pension will be a welcome bonus for those receiving less than £144 per week but others will see their retirement income start dropping and will be worse over the longer term.
If you are worrying about your future retirement income falling call me on 0141 290 0262 to arrange our Free Consultation.