In an effort to simplify the State Pension, the government will be introducing the single-tier flat rate, which will replace the complicated two-tier system that is currently in place.
The new scheme will begin from the 6th April 2016 and will affect men born on or after 6th April 1951 and women born on or after 6th April 1953.
The single-tier flat-rate State Pension will pay a maximum amount of £155.65, which is an improvement from the current system. However, there is concern that many believe that they will be entitled to the full amount, when in fact, they could receive less. Certain measures will be taken into consideration when calculating the accurate amount and the main factor will be if the individual has contracted out at any time, as this will ultimately affect the National Insurance (NI) payments throughout that period.
Under the new system, Individuals will need at least 10 'qualifying years' of NI contributions to qualify for any State Pension and 35 qualifying years to receive the full amount.
Many retirees will assume that they will qualify for the maximum amount of £155.65 because they have made contributions over the necessary number of qualifying years. But in order to accurately determine the amount received, the process will consist of two calculations. The first will take into account contributing years as well as deductions for contracting out in order calculate how much of the new single-tier pension they are entitled to. The second calculation will use the old regime, looking at what the individual could have been paid. A comparison will then be made to ensure they do not receive any less than the old regime.
If you would like to know how much State Pension you will receive, it is important to note that the Department for Work & Pensions do not automatically issue a forecast of State Pension benefits until shortly before state retirement age. You can request a forecast at any time from the age of 55, but it does require you to request it in advance.
By requesting a statement of your benefits early enough, it provides you with the opportunity to make up any potential shortfall, either through additional contributions whilst still working or by better management of your pension pot.
If you have any questions regarding the State Pension or your savings for retirement, please contact us on 01489 878300.