Earlier this year, the government announced plans to abolish the existing two-part pension and introduce a simpler, fairer single-tier system in 2016. The aim of the new pension is to reduce the complexities of the current state pension and provide clarity regarding the value of individuals’ income in retirement.
Who will be affected and what does this mean for the future of your state pension?
- The new pension will apply to people who reach State Pension age after the changes are introduced and will not affect people who are already in receipt of the current state pension of £110.15 a week or up to £142.70 if they receive pension credit and/or the second state pension.
- Workers retiring after that date will have to build up 35 years of National Insurance contributions to get the full £144 a week, which is expected to have risen to £155 by 2016. Taking a career break to raise a family will also be counted towards the total NI contributions needed for a full state pension. To qualify for any pension at all you will need to have worked a set number of years – this has not yet been confirmed, but is likely to be between 7-10.
- Non-working partners in married couples can currently claim up to £66 per week ‘Married couples pension’ throughout their retirement. However, under the new changes from 2016, couples will each qualify for the full new payment as individuals, rather than receive the current less generous joint couple’s rate.
- Means testing for the pension credit will also end. Pensioners whose income falls short of a guaranteed minimum currently have to undergo detailed assessments of their income and savings.
- The pension can be deferred beyond State pension age, but the only option will be to increase the amount of State pension, unlike now when you can opt to receive a lump sum. The rate of increase applying in deferment has not been set yet, but the white paper released in January indicated that the rate could be 50% of the current rate, i.e. 5.2% per annum. The taxable lump sum option will be removed.
- If an individual has accrued state pension that is of a higher value than the full level of the single tier pension as a result of transitional protection, the pension in payment will increase in line with the Consumer Price Index.
- Contracting out of the second state pension will also end when the reforms are implemented in 2016. This will result in an estimated six million workers facing higher National Insurance payments in future.
Retirement and Investment Solutions will be continuously monitoring the changes surrounding pensions for clients, keeping you up-to-date with the latest developments that could affect your retirement income. If you have any questions regarding your pension, please contact us on ....