Thursday, 18 December 2014

Understanding the UK State Pension Reforms

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From April 2016 a new single-tier state pension system will come into effect in the UK which will be the biggest overhaul in recent history. This will replace the current system which is made up of the basic state pension (£113.10 a week for a single person in 2014/15) and the additional state pension (up to a maximum of £163 a week in 2013/14), also known as State Earnings Related Pension Scheme (Serps) or state second pension (S2P). The single-tier pension will be a flat-rate worth £144 a week in today's money. 

Who will benefit?

This will be good news for the self-employed, who do not currently qualify for the second state pension, for women who may have gaps in their national insurance records from caring for children (they will receive more state pension), and taxpayers in the long-term, with current government spending projections on pensions decreasing from 2040. Conversely, for others such as public sector workers in contracted out defined benefit, or final salary schemes, will see their national insurance contributions rise - effectively meaning a pay cut for them. It will also effect high earners who will no longer be able to accrue a state pension of over the basic rate, this is because the flat-rate pension will be capped regardless of length of contributions or earnings.

Qualifying for the new single-tier state pension

Under the changes, only those who reach state pension age (for men this is currently 65 and 60 for women) from April 2016 onwards (men born on or after April 6 1951 and women born on or after April 6 1953) will be eligible for the new single-tier pension, with those reaching state pension age before this date remaining on the old system. Additionally, in order to qualify for the new single-tier system you will need to have built up 35 years of national insurance contributions, which is 5 years more than the current 30 year requirement, or build up more National Insurance credits (claimed if your income is below a certain level). Those with less than the required amount of contributions will not be eligible to receive the single-tier state pension and will receive a smaller pension based on pro-rata contributions. Those who have a starting entitlement higher than the rate of the single tier from a combination of the old basic state pension and Serps will still receive the higher amount, while those who have contracted out of the state second pension will have a deduction taken from their new single-tier pension since their state pension entitlement will be delivered through a private scheme instead.

Marriage, divorce and bereavement

It should also be noted that there are changes to the way pensions are inherited or claimed which may effect your retirement planning. There is some protection in place for these situations but as they currently stand the rules for marriage, divorce and bereavement will end. Spouses and civil partners will not be able to claim a state pension based on a partner's national insurance contributions, widows and widowers will no longer be able to inherit a partner's pension and divorcees will not be allowed to substitute their ex-partners national insurance record for their own.

Boosting your pension

So, is there a way to boost your current state pension in preparation for the transition? The answer is yes, you can do this with the state pension top-up scheme. This allows those reaching the state pension age before April 2016 to increase their entitlement by £1 to £25 a week in return for a one-off payment, this voluntary National Insurance contribution is known as Class 3A and is open to men born on or before April 6 1951 and women born on or before April 6 1953. Another option is to delay claiming a state pension in order to boost it, however, it should be noted that if you were born on or after April 6 1951 (men) and on or after April 6 1953 (women) you will not be able to defer your state pension age in order to qualify for the new single-tier pension. If you do defer, the rate of increase for deferring a full year of the single tier system will fall from 10.4% to 5.8% and the option to receive a cash lump sum will not be available.

If you are in any doubt as to your state pension entitlement or if you would like to review your retirement provisions in general, we have extremely knowledgeable advisers who would be more than happy to review your circumstances and ensure that you are getting the most for your retirement. To read more about the 2016 state pension reforms you can visit the website for detailed information.

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