The New Flat Rate State Pension – Is It Worth It?

The reform of State Pensions gained pace earlier this year with plans being put forward by the Government to be discussed in Parliament. The second reading, which was due on 17th June, would then mean that an MPs’ committee would look at the proposals in detail. So this is not yet ratified and changes could well be made.

The reform of State Pensions gained pace earlier this year with plans being put forward by the Government to be discussed in Parliament.

The second reading, which was due on 17th June, would then mean that an MPs’ committee would look at the proposals in detail. So this is not yet ratified and changes could well be made.

So what is this proposed new single-tier State Pension all about, why is it being introduced and how will it affect you, if at all?

Key reasons why the Government want to change things are:

– The existing system is complex

– There are high levels of means-testing

– It creates inequality, eg women overall tend to have a lower State Pension than men.

So they want to introduce a system that aims to make matters simpler, fairer and be easier for people to plan ahead by having more certainty about what their State Pension will actually be.

The changes:

– The proposed new pension will be £144 per week in today’s money compared to around £110 per week now

– You will need 35 years National Insurance (N.I.) contributions, not 30 as is the position now

– You will not qualify for any pension if you have less than 10 years N.I. contributions

– Only your own N.I. contributions will be taken into account, so no claim is eligible on a partner’s working history (married couple’s pension will be abolished)

– All top-up pension arrangements will cease (such as State Second Pension)

– It is possible to build qualifying years even if you take time out from working to raise a family

– You can no longer defer taking your State Pension in exchange for a lump sum

What hasn’t changed:

– Your pension will rise in line with average earnings, the Consumer Prices Index or 2.5% as at present

– You will still be able to delay your pension in exchange for a higher pension

So when are these changes due to take effect?

As mentioned, although the finer detail may yet be altered, the current expectation is that the new higher flat rate pension will be introduced by 2017 at the earliest.

However, in the budget this year it was announced that those reaching state pension age on 6th April 2016 will then qualify for the new amount when it is introduced. A key point here is that those who are in receipt of the state pension before that date will not be eligible for the increase.

It has also been made clear that choosing to defer drawing your pension won’t mean you qualify for the higher pension.

Some common questions are:

Q. Has the age at which I will qualify for a state pension changed?

A. No. The status quo applies with women retiring at 65 by 2018. Then for men and women it will rise to 66 between 2018 and 2020. By 2026, it will have risen to age 67.

The Telegraph reports that reviews will be carried out every five years, based on the principle that people should receive their state pension for a specific proportion of their adult life. This means that, as life expectancy increases, the state pension age will also rise.

Q. What if someone works out that they will not have the required 35 years of N.I. contributions – what will this mean to their pension and what action can they take to buy extra years?

A. Taking an example where someone has built up, say, 30 qualifying years, they will receive 30/35ths of the full flat rate.

It is possible for this person to ‘buy’ the missing years, although this needs to be done within 6 years of those that are missing. Subject to this rule, you can still buy years after retiring.

Q. Is the State Pension worth bothering about?

A. Some individuals do not realise how much income a couple of a similar age can actually have each month.

With the new state pension levels, and presuming a couple qualify for the maximum, we are talking about a joint pension of around £15,000 pa, or £1,250 per month!

Not to be sniffed at!

In Summary

The government want this whole exercise to be cost neutral.

This suggests that, as ever, there will be winners and losers.

Age UK summarise by saying that, overall, they expect the lower paid and self-employed to benefit and higher earners to lose out.

Indeed, as Minister for Pensions Steve Webb said:

“Our reforms will create a simple, decent State Pension, which is set above the basic means test. The new State Pension will be fairer to the low-paid, the self-employed and carers and make it easier for people to understand what they will get from the State when they reach State Pension age.”

Please note that this article is by no means fully comprehensive and merely highlights the major changes as we see it. As stated, further changes and amendments may well be made.

Key Considerations

This is the biggest shake up for State Pensions, possibly since their introduction. It’s vital you work out your N.I. service and how these changes will affect you and your spouse or partner.

Action Point

Be informed and take action!

Do you know your (and spouse?) N.I. contributions history?

Will you be able to achieve the maximum state pension?

Ask your financial adviser to check.

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