Autumn 2015 Newsletter
Looking forward to the new flat-rate State Pension?
To ask any question about the new flat-rate State Pension scheme seems to suggest a straightforward answer. Everyone will get the same amount won't they?
The answer to the latter question is no. The amount you will get will depend upon a number of factors including:
- how many qualifying years you have on your National Insurance (NI) record
- how many years you have built up an entitlement to the additional State Pension under the current system
- how many years you may have been paying lower NI contributions because you have been in a salary-related workplace pension scheme or you received NI rebates which went into a personal pension plan. Either of these scenarios had the effect of 'contracting out' a person from full entitlements under the State Pension scheme.
The new State Pension scheme applies to everyone who reaches State Pension age on or after 6 April 2016. The full State Pension will be at least £151.25 but the actual amount will be set this Autumn. People who have no contribution record under the current system will have to obtain 35 qualifying years of NI credits on their record to give them the flat-rate amount.
However, for individuals who have already built up a NI record (which is nearly everyone reading this article) there are transitional provisions which take into account the NI record accrued up to 5 April 2016. This is a very reasonable complication to have in moving to the new system. Otherwise, people who have accrued a substantial entitlement under the current system of basic and additional State Pension would be treated very differently depending on whether they reach State Pension Age on the 5 April 2016 (and thus receive a pension under the current system) or on the 6 April 2016 (and therefore receive a pension under the new system).
Under the transitional provisions, your NI record before 6 April 2016 is used to calculate your 'starting amount' for the new system at 6 April 2016. Your starting amount will be the higher of either:
- the amount you would get under the current State Pension rules (which includes basic State Pension and additional State Pension)
- the amount you would get if the new State Pension had been in place at the start of your working life.
For many of those reaching State Pension age in the near future, the transitional provisions offer the best of the current and new systems. Employees who have built up a significant entitlement to the additional State Pension will retain their entitlement. People who have been self-employed for most of their working lives may have little or no entitlement to the additional State Pension and thus will benefit from the new State Pension rules.
Example - self employed
Joe will reach his State Pension age in October 2020 (the State Pension will have risen from 65 to 66 by then). He has been self-employed except for the early part of his working life and he has no entitlement to additional State Pension. He has 32 qualifying years on his NI record.
His starting amount on 6 April 2016 (based on current figures) will be:
- under the existing rules - 30 years NI record would give a full entitlement to the basic State Pension of £115.95 a week
- using the new rules - Joe would get £138.29 a week (£151.25 x 32/35).
Therefore his starting amount is £138.29. As his starting amount is less than the full rate of the State Pension, if he continues working for three years after 6 April 2016 he will accrue sufficient additional pension rights under the new system to bring him up to the full rate of £151.25.
Example - employed
Maureen will reach her State Pension age in October 2020. On 6 April 2016, Maureen has 35 qualifying years on her NI contribution record. During her working life, Maureen has had short periods when she was contracted out of the additional State Pension.
Her starting amount on 6 April 2016 will be:
- under the existing rules - her 35 years NI record would give her a basic State Pension of £115.95 a week plus £86 additional State Pension but a deduction for her contracted out period of £32. (This will be computed by the Department of Work and Pensions.) This totals £169.95.
- using the new rules Maureen would get £151.25 less a deduction of £32. This totals £119.25.
Maureen's starting amount will be the higher of these two amounts, which is £169.95 a week. As her starting amount is more than the full rate of the State Pension, she cannot accrue additional pension rights under the new system.
How do you get a state pension forecast?
You can get a forecast in some cases online - in other cases you need to ask for a forecast by post. Go to www.gov.uk/state-pension-statement to find out.