This month marked one year since the retirement freedoms were launched to give people aged over 55 more control over their pension pots. And on this first anniversary, the pension rules will also now change in a bid to make them easier to understand.
However, new research from consumer champion Which? has shown that there is still confusion about how the new system impacts Brits. 89% of those questioned were unaware of the new state retirement ages that will come in to force, nor the new full payment rate for the state pension.
So what do you need to know?
Firstly, if you are already in receipt of a state pension before the 6th April 2016 then these changes will not affect you - though you do have the option to top-up your existing pension scheme.
When are you entitled to receive your state pension?
- The age at which you can receive your state pension is increasing. Currently for men it is 65 and for women the current state pension age is 63, rising to 65 by November 2018.
- From December 2018 the state pension age will increase for both men and women, until it reaches 66 in October 2020 and 67 between 2026 and 2028.
These age increases reflect that we are living longer and so we need to work longer (and pay more in National Insurance contributions) in order to keep the Government pension pot topped up.
How much state pension will you receive when you retire?
The full new state pension will be £155.65 per week but the actual amount you will receive will be based on your National Insurance (NI) record. While you may typically need 10 qualifying years to get any new state pension amount, in order to qualify for the full benefit you may typically need to have worked in the UK for more than 35 years.
Did you contract out of the state pension?
Being contracted out - even for a short period of time - could leave you with a much smaller pension than you may have expected. This is because, if you have ever contracted out of the state pension, you will not have your contributions counted for the period for which you were removed from the system.
The Which? study found that only 18% of the 1,000 people surveyed knew if they had ever been contracted out of the state pension. So, if you are unsure as to whether you have ever been contracted out (which typically happened if your employer offered you a final salary pension arrangement,) then ring for a pension forecast from the Government’s Future Pension Centre on 0345 3000168.
How you can find out how much state pension you will get?
Understanding how much pension you can expect is imperative for your future financial planning. It can highlight if there are any ‘shortfalls’, and the earlier you find out, the more time you have to take action that will increase the amount of state pension you may eventually get.
You can visit the government website to see the different options for how you can get a state pension quote depending on your age. You can get a statement online at any age, providing you have a ‘Government Gateway’ account. If you don’t have an account, registration only takes a couple of weeks. Once you have received your forecast, you can make a more informed decision as to what to do next.
How can you increase what you will get?
People who probably won’t achieve the equivalent of the full level of new state pension typically may include those who’ve had career breaks and have not paid National Insurance contributions for the full number of years; and, stay-at-home mums who’ve missed out on the additional state pension.
You may, however, be able to increase your pension amount by:
- Continuing to work and paying NI contributions until you reach state pension age.
- Seeing if you can apply for NI credits to fill gaps in your NI record.
- Paying voluntary NI contributions or by deferring your state pension when you reach state pension age, to build up extra pension money when you do claim it.
- Using any tax-free cash and pension income from your employer’s pension scheme after your 55th birthday, to cover the costs associated with making up any shortfall in your state pension entitlement.
The aim of the new flat-rate pension scheme is to make understanding pensions entitlements simpler going forward. Making sure you are informed as to what these are now will allow you to future proof your finances for when you retire.