Will you get the best out of the new State Pension?17 December 2015 Back to results
Back in April, I explored the changing rules of the State Pension and discussed how important this was when factoring it into your financial plans for retirement. Earlier this week, I attended the Work and Pensions Select Committee (WPSC) to give an industry perspective on how changes to the state pension could be communicated more effectively, based on Aegon’s experience of communicating to customers.
The key point, as I originally raised below, is that many people still believe they are going to get the full new State pension of £155.65 a week, as they haven’t been told differently. To help the UK plan for their retirement, I think the government should send everyone annual personalised statements telling them exactly how much State Pension they’re on target to get, what they can do to increase it and the reasons for any deductions made just like we do in the private sector.
Digital communications will play an increasing role in helping people get ready for their retirement. And that should include the state pension. Everyone needs to have an accurate estimate of what they are going to get from the State and from when, before accessing the Pension Freedoms, and potentially making decisions which they may come to regret. Currently the government pension online service doesn’t go far enough. There’s an online pension calculator – but it’s only designed for those under the age of 55 – and only on the current basic State pension – which of course won’t be relevant any more. And those who are over age 55 will only get a new State pension statement if they request one using the online form, or ring up the DWP. Many people want online digital personal solutions with calculators and ‘what if’ scenarios. The pension industry is already working hard to give its customers digital support such as those offered by Aegon, Retiready, a digital planning service. It would be really helpful if the government could do likewise.
I hope you don’t mind me asking, but how much do you earn? You probably know right down to the last penny, but let me ask you a different question – when you retire, how much will you get from the State Pension?
This is important because if you don’t know what your State Pension entitlement is, then it’s impossible to factor it into your financial plans for retirement. It’s also worth thinking about because from next April the government is changing the rules on how much you’ll receive and what’s needed to get the full amount.
From April 2016, a single, flat rate State Pension will come into force and replace the existing basic and additional pensions that people get today. The new State Pension will apply to men born on or after 6 April 1951 and women born on or after 6 April 1953. So it won’t affect those who are already receiving a State pension before April 2016.
The government says the maximum entitlement under the new State Pension will be at least £148.40 a week and the exact figure will be announced later in the year.
To get the full amount you must’ve have paid 35 years of National Insurance contributions. This is up from the 30 years needed to secure the full basic state pension under the current system, so it’s worth checking you won’t fall short. If you’re not sure how many years you’ve already got under your belt, you can request a National Insurance Statement - https://online.hmrc.gov.uk/shortforms/form/NIStatement(Opens new window)(Opens new window) - from HMRC.
You must have at least 10 years of National Insurance contributions to be eligible for anything from the new State Pension. 10 years will give you 10/35 of the full entitlement and you’ll get an extra 1/35 for each additional year.
But there are exceptions to the number of years needed and depending on your exact circumstances you’ll be able to get National Insurance credits if you’ve suffered illness or disability, or if you’ve been a carer or been unemployed. Your National Insurance Statement will let you see exactly how things stand and if you’re not going to build up the years required to get the full amount, you can make voluntary contributions to cover any missing years.
Not everyone will get the same amount from the new State Pension. There will be complicated transitional arrangements to work out your entitlement, which will have a deduction applied if you were previously contracted out of the additional state pension and paid lower National Insurance contributions as a result.
This will impact most people in work and so you should take the time to investigate if and how you’re going to be affected - https://www.gov.uk/new-state-pension/youve-been-in-a-workplace-personal-or-stakeholder-pension(Opens new window)(Opens new window).
From age 55, everyone will be able to request a personalised statement - https://www.gov.uk/state-pension-statement(Opens new window)(Opens new window) - giving an estimate of their new State Pension entitlement, including any deductions. This option will gradually be rolled out to the entire working age population. The sooner this happens the better, as it’s never too early to start thinking about whether the retirement income you’ll receive is enough to fund the lifestyle you want. If it’s not then an early warning will give you more time to make plans and overcome any shortfall.
It’s also important to factor in changes to the State Pension Age that’ll affect when you begin receiving whatever entitlement you’ve built up - https://www.gov.uk/calculate-state-pension/(Opens new window)(Opens new window)
Between April 2016 and November 2018 the State Pension Age for women is moving to 65. For both men and women it’ll then be increased to 66 between December 2018 and October 2020, before it gets bumped up to 67 between 2026 and 2028.
Changes to the new State Pension affect us all and so if you want to make the most of your later life, it’s crucial to work out what you’re going to get from the State and what more you need to do to build up the income you’ll need in retirement.