The State Pension has changed beyond recognition in recent years. If you’re 55 or over, it’s important to get to grips with the changes, so you can take advantage of any benefits – and aren’t caught out by any nasty surprises.
- The flat rate State Pension
- Transition arrangements for the new State Pension
- National insurance contributions
- Increase in the state pension age
- Pension freedom
This was introduced in April 2016, and in principle means everyone who retires after that date is entitled to the same pension payment.
However, in order to qualify for the full payment, you will need 35 years of National Insurance contributions – or credits for the years when you had caring responsibilities. This is an increase from 30 years under the old system. If you have fewer than 35 years, you will receive less. If you have fewer than ten years, you will not be entitled to a State Pension at all.
There may also be a reduction if you were contracted out of the State Pension for any period. The government works on the basis that you were building up pension entitlements elsewhere as a result. It therefore reduces your State Pension accordingly.
If you are concerned that any of these exceptions may apply to you, it’s worth getting a State Pension forecast.
Before April 2016, the State Pension worked on a two-tier system. There was a basic state pension, received by almost everyone, and a second pension (S2P). The latter was based on the contributions you made into it. These, in turn, were based on your salary and number of years of contributions.
The dramatic change in the system risked penalising those with large S2P contributions. It means that the new system has transition arrangements built in. These calculate what you have built up under the old system, and what you have built up by April 2016 under the new system. It then uses the higher of the two figures as your ‘starting amount’. After April 2016, any further years that you pay National Insurance will be added to that starting amount, until you hit the flat rate State Pension.
If you built up more than the flat rate under the old system, that will be protected, and you will receive the higher amount. However, any further National Insurance contributions made from that time onwards will not add to your State Pension.
You can apply to see your National Insurance record through Directgov. This will show how many years of National Insurance contributions you have made so far. If you need to ‘buy back’ some years to hit 35, you can do that. You can usually pay a lump sum to top up the past six years of National Insurance contributions. Your record will show how many years you are able to buy back, and how much it will cost you.
There is also a short-term top up called Class 3A contributions – expiring in April 2017. This enables you to top up your state pension by up to £25 a week by paying an additional lump sum. There is more information available on the Government website.
Traditionally men retired at 65 and women at 60, but in an age of gender equality and with an ageing population, the government decided that this wasn’t sustainable.
The State Pension age has been rising for women since 2010. The first rises were gradual, but the process was subsequently accelerated, so that it will now reach 65 in 2018.
At that point the State Pension age will rise for both men and women to reach 66 by 2020, and 67 by 2028. It will then rise in line with longevity. It is broadly expected that young people in work today will not receive a State Pension until they are in their 70s.
You can check your predicted State Pension age at Directgov’s State Pension age calculator.
In the past, if you had a defined contribution pension, you would eventually have to use your pension pot to buy an annuity. Since April 2015, however, pensioners have had far more freedom.
They are able to access their pension pot at the age of 55. They can still buy an annuity, but they can also take whatever sums they like from the pension pot – whenever they like. They can use it to draw a regular income, or withdraw every penny on day one. They will be subject to tax at their marginal rate, but this is far less than the old charge of 55% on full withdrawals.