The state pension is changing from April 2016 however, a study by the Department for Work and Pensions (DWP) showed that only 22% of people understand how the change will affect them. The new state pension is supposed to be a simpler scheme than the current one, although there are still a few finer details.
Speak to a financial adviser who can help you understand your entitlements.
What is changing?
From April 2016, the existing state pension will be no more and a single tier state pension will take its place. It will affect:
- All men born on or after 6 April 1951
- All women born on or after 6 April 1953
This means no more:
- Basic state pension
- Graduated state pension
- State earnings related pension
- State second pension
- Contracting out option
- Inheriting pension for married women
The calculations behind this single tier amount are complex and whilst on the surface it may seem like everyone benefits, this new scheme is expected to cost the Government less…so naturally some will benefit more than others from the proposed changes.
The new single tier pension
The basic state pension now is £115.95 per week.
Under the new single tier pension you will be entitled to up to £148.40 (*) per week, essentially £32 per week more.
* This is an estimate from Which.co.uk as actual figures will be announced in Autumn 2015.
The new amount will be increased each year by either price inflation, growth of earnings or 2.5%, whichever is the highest. A “means tested credit” pension could give an estimated pension of £151.25 per week, or more.
Your pension depends on your NI contributions
To claim the full amount under the new state pension, you are required to have paid 35 years National Insurance (NI).
If there is a shortfall you will be able to add to the NI pot for the years that have been missed. Alternatively, the pension amount will be pro-rata’d.
To be eligible for any state pension under the new system, you will need to have contributed a minimum of 10 years NI.
Who benefits and who doesn’t?
Many factors come into play with the new system.
Broadly speaking though, married couples who have both made full NI contributions, public sector workers and self-employed workers should benefit from the new system.
Those who have built up enough NI contributions to quality for a second pension, however, could lose out with the new system.
Especially with changes to the NHS pension, it is recommend to work through detailed calculations with your financial adviser. Of course, state pension rules could change again before your retirement age, however, this is the most radical change in many decades so hopefully there will be some consistency for a while now.