On the 6th April 2016, a new theoretically less complex, single tier State Pension system will be introduced. Whilst this pension reform will affect everyone, some will benefit more than others from the proposed changes. Which category will you fall into?
What is changing?
You may need to scroll left and right if you’re viewing the table below on a small screen.
|Current vs Planned Single Tier System|
|State Pension Entitlement||Current System: When you reach the state pension age*, you qualify for a basic state pension worth up to £115.95 per week.|
|Single Tier System: When you reach the state pension age*, you will be entitled to a single state pension of up to £148.40† per week. This sum will be increased each year by the highest of either the growth in earnings, price inflation, or 2.5%. If you're eligible for means tested pensions credit, as well as your basic state pension, your total state pension entitlement will be no less than £151.25** per week.|
|Second State Pension Entitlement||Current System: You may also be entitled to a second state pension if you've built up enough National Insurance (NI) contributions.|
|Single Tier System: There will be no second state pension.|
|Contracting Out Option||Current System: If you're in a final salary scheme, you are able to contract out from the second state pension and pay lower NI contributions.|
|Single Tier System: There will be no contracting out option.|
|Gender||Current System: Married women who have no entitlement themselves are eligible for 60% of their husband's sate pension. They will also inherit his pension when he dies.|
|Single Tier System: Pensions will be based on an individual's own NI contributions with no opportunity to inherit rights from anyone else.|
|National Insurance Contributions||Current System: 30 years of NI contributions to qualify for the full basic state pension of £107 per week.|
|Single Tier System: 35 years of NI contributions to qualify for the full single state pension of £148.40 per week.|
When is the state pension system changing?
The new State Pension comes into effect on the 6th April 2016. It affects:
- All women born on or after the 6th April 1953;
- All men born on or after the 6th April 1951.
What does ‘up to’ £148.40 per week actually mean?
To be eligible for any state pension at all, you will, under the new system, need to have a minimum of 10 years of NI contributions.
If you have the full 35 years NI contribution quota, you will be entitled to the £148.40 per week state pension.
If you have between 10 and 35 years’ worth of NI contributions:
- You will be able to add to your contributions for any years you have missed;
- Your state pension will be pro rata’d accordingly.
Who benefits from the change?
1. If you’re eligible for only the basic state pension, you will receive up to £32 per week more under the new system.
2. If you’re a married couple with sufficient qualifying NI contributions, you will each be entitled to £148.40 per week. That’s a total of £296.80 per week compared to the current £231.90 per week if you have both paid full NI contributions, or £185.46 per week if one of you has insufficient NI records to receive a full pension.
3. If you’re self-employed, you will be entitled to the higher £148.40 per week single state pension. Even under the current system, you’re not eligible for a second state pension and you can only add to your basic state pension if you qualify for means tested pensions credit.
4. Similarly, if you’re a public sector worker retiring after the 6th April 2016, you are only entitled to the basic state pension in addition to your workplace pension. The higher rate of £148.40 per week is therefore in your favour.
Who doesn’t benefit from the change?
1. If you have built up your NI contributions to a level that would currently entitle you to a second state pension, your combined basic and additional state pensions under the existing system are likely to be higher than the proposed £148.40 per week.
This is particularly true for high earners and young workers who will no longer be able to build up a second state pension. However, because you will still be entitled to any second state pension accumulated before the new system is introduced, your pension income may, at first, be higher than the £148.40 per week.
2. If you’re working and in a final salary pension scheme you may, under the new system, have to pay higher NI contributions.
3. Employers who offer a final salary pension scheme may also have to pay higher NI contributions. This may ultimately lead to them closing such pension schemes.
4. Married women who do not have the qualifying number of NI contributions will themselves not be eligible for a state pension, nor will they be entitled to any part of their husband’s pension.
What does all this mean?
Knowing exactly how much you will be getting from the Government when you retire will make retirement planning much easier. You and your financial adviser will know what shortfalls exist and what savings plans you need to put in place to fund your desired income and lifestyle in retirement.
The 6th April 2016 is less than a year away and there is, of course, always the possibility that the Government will make last minute adjustments to what is proposed. Whether state pensions will actually be around in years to come is another matter!
Bearing in mind the recently introduced 2015 NHS Pension Scheme’s normal retirement age is linked to the individual member’s state pension age, it would certainly be worth asking your financial adviser to audit your pension provision and determine what, if anything, needs addressing.
Will you benefit or lose out when the single tier State Pension is introduced? Let us know by adding a comment below.
This article was first published in February 2013 and updated in June 2015. *The state pension age will be increasing to 67 for both men and women between April 2026 and April 2028. † Current estimate only Which.co.uk; Actual figure to be confirmed in Autumn 2015. ** www.gov.uk