Get your state pension back on the right track
Workers aged 40 and over are being urged to obtain a forecast of their state pension to avoid huge financial disappointment when they reach official retirement age.
It has never been easier to obtain this information. Nor has it been more important to act early to squeeze the best value from the state scheme.
But many accessing their forecast will be shocked at what they find.
A new state pension now applies to those reaching retirement – it has been in force since April last year.
This replaces the old basic state pension and various top-up arrangements: Serps, the State Second Pension or graduated state pension.
The new pension promises £159.95 a week for those who have made the required 35 years of National Insurance contributions.
All hail pensions equality. But in reality, some pensioners are more equal than others.
Steve Webb, former Coalition Government Pensions Minister and now director of policy at insurer Royal London, says: ‘Many people think that if they have 35 years of contributions they will get a full pension ... and get a nasty shock when they do not.’
The main reason many do not receive the full amount is they have paid less in National Insurance than other people.
Webb says: ‘This principally happens if they were contracted out of the top-up state pension.’
Millions of people contracted out. This meant National Insurance contributions were diverted into a workplace or personal pension.
The deal was promoted heavily by the Conservative Government in the late 1980s.
For a period savers were given sweeteners in the form of enhanced rebates – and they paid lower National Insurance rates.
The expectation was that by being invested in the stock market these contributions would provide a bigger retirement income than the state top-up equivalent.
The arrangement ended in 2012 for contracted-out personal pensions and last year for workplace-based schemes.
But it has left a tricky financial legacy for many.
This is because low-interest rates have conspired against many of those who contracted out.
Those whose rebates went into workplace schemes are protected but millions who contracted out into personal plans are not.
The Department for Work and Pensions says no one who qualifies for the new state pension will be left with less than they would have received under the old system.
It says: ‘The new state pension provides a solid foundation for people to build their private pensions savings.
‘People who have been contracted out will usually have paid less in National Insurance over the years while they built up a private pension which they will also benefit from in retirement.’
Carl Emmerson, of research group the Institute for Fiscal Studies, says there will be state pension winners as well as losers.
He says: ‘For those contracted out into defined contribution pension schemes, whether their pension is lower, the same, or higher than the pension they would have got from the state depends on the investment return that they achieved.
‘The original rebate offered was such that it looked a good deal for many people, especially younger workers. But it was cut back.
‘Some will have achieved greater investment returns than was assumed when the rebate was set – others lower.’
Vital to make up for lost contributions
Check your State Pension age
Go online at gov.uk/state-pension-age. But those born between 1970 and 1978 need to add on a year as plans are afoot to bring forward phasing in of a higher state pension age – from 67 to 68.
Get a pension forecast
Find out your National Insurance contributions record via the Government Gateway at gateway.gov.uk.
Register and wait for a user ID online and activation code through the post. Or use the speedier government verify scheme. It takes 15 minutes to confirm your identity the first time you use gov.uk.verify and two minutes thereafter.
You will need to choose from one of seven companies to verify your identity, including the Post Office, Royal Mail and Experian. Have to hand your National Insurance number and passport, driving licence or credit card. You can also complete a BR19 form (download from the gov.uk website) and have a statement posted to you. Or phone The Future Pension Centre on: 0345 3000 168. Les Cameron, retirement expert at insurer Prudential, says: ‘Getting the forecast as early as possible gives you the chance to plan ahead relatively pain-free.’
Get to grips with your statement
The figures tell you how much pension is due, based on your National Insurance contributions. It will also state how many more years you need to achieve the full flat-rate pension. This does not currently take into account the earlier phasing in of the state pension age to 68.
If you contracted out there is also a figure showing what you would have received if you had stayed put – the Contracted Out Pension Equivalent or COPE. Those who contracted out using a workplace scheme have this sum protected. For the millions who chose to put their rebate into a personal plan, their pension will depend on the fund’s performance. Check to see if it is on track.
For guidance, contact The Pensions Advisory Service on 0300 123 1047. Find a pensions adviser via unbiased.co.uk.
Make up the State Pension shortfall
Consider topping up your state pension if you have ‘gap’ years in your National Insurance record. Usually, it is possible to plug gaps going back six years.
Mary Waring, of financial adviser Wealth for Women, says: ‘Buying extra years’ state pension is a good deal. A one-off voluntary payment of up to £733.20 buys an extra £4.45 a week or just over £231 a year.
‘You would need to live less than four years after state pension age to get your money back. Make it into your mid-80s and you will have got back more than five times what you put in.’ Former Pensions Minister Ros Altmann says that those who contracted out have special permission to build more new state pension by continuing contributions – even if they already have a 35-year National Insurance record.
She says: ‘It means people who contracted out will end up with the full new state pension, plus the contracted-out pension they built up elsewhere.’
Anna Sofat, adviser at wealth manager Addidi, says: ‘It is important to make up for lost contributions. For a couple in receipt of the full flat-rate pension, that is an income of more than £16,600 a year.’
Continue working or caring
Altmann says: ‘Either keep on paying National Insurance until you reach state pension age or claim NI credits if you are caring for others. If you care for grandchildren for a number of hours a week you can get “grandparents credit” and earn extra state pension.’
Credits are also earned in other ways, such as being unemployed or ill, on benefits or doing jury service. High earners should claim Child Benefit, says insurer Scottish Widows. If they then opt out they will have gained a credit for the non-earning spouse.
Consider other ways to plug gaps
People aged 39 to 47 may want to make up the loss of a year’s state pension by funding a personal pension. A 47-year-old who expected the equivalent of today’s flat-rate pension of £8,320 a year at age 67 would have a funding gap of £13,633 (assuming a 2.5 per cent annual increase in the state pension).
By saving into a personal pension, the annual cost of covering this gap via a personal pension is £366 for a basic rate taxpayer, £275 for a higher rate payer or £252 for an additional rate payer, assuming 4 per cent per annum investment growth.
Prudential’s Cameron says: ‘Buying extra state pension provides a guaranteed extra income. But you can’t access it until state pension age. By using a personal pension you take on investment risk and the income is unknown. But you can take benefits from 55 and pass the fund to family when you die.’
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