A new “flat rate” state pension was introduced in April 2016 to “simplify” the previous two-tier system. It has done anything but. Factor in the constantly changing age at which we can draw our state pension and you have utter confusion. Here are the basics to help you through the muddle.
What are the changes?
If you were eligible to receive your state pension before April 6, 2016 you will be stuck on the older state pension system. This was made up of two parts, the basic state pension, based on your national insurance record. If you had 30 qualifying years, you received the full amount, currently £129.20 a week.
Pensions: Everything you need to know explained in Daily Express guide State pension warning: Claimants lose out if they don’t work 35 years
Then there was an additional state pension based upon your earnings, NI record and any periods when you “contracted out” to pay into a private pension. The new state pension is based on your NI record, and you will need 35 years of full contributions to receive the full amount, currently £168.60 a week. When you receive your pension depends on your date of birth, with the age currently rising to 66 for men and women by October 2020.
But the state pension age is increasing again to 67 between 2026 and 2028, affecting those born after April 5, 1960. A further increase to 68 is planned between 2044 and 2046, affecting those born from April 6, 1977. But experts predict this will be brought forward.Adding yet more uncertainty is the fact you may receive less than the £168.60 or more. Many people find they get less because of a complex ‘contracting out’ system where they paid slightly lower NI contributions and more was invested in their workplace pension. Huge numbers are angry to find out they will get less state pension than expected.
How do I make sense of it all?
The simplest way is to ask for a state pension forecast. It’s free and it will show your projected state pension age and an indication of the amount you’re likely to receive.
It’s really worth checking this every year as you approach retirement as the Government keeps making changes.
Use gov.uk/check-state-pension or contact the Future Pension Centre on 0800 731 0175
It is plain sailing if you do your pensions homework (Image: GETTY)
It’s really worth checking your state pension forecast every year (Image: Getty)My forecast includes a figure for Contracted Out Pension Equivalent – what is that?
This is the amount of pension the Department for Work and Pensions thinks you will receive from your private pension because at some point before April 2016 you were contracted out of the old state pension system. You would have paid lower NI contributions at the time and more would have been paid into your workplace pension.
You will, therefore, receive a smaller state pension. But it may not be clear if your private pension includes a contracted out element to make up this shortfall – this is what is causing confusion as the state pension shows a shortfall but private pensions don’t spell out that they include Contracted Out Pension Equivalent (COPE).
If you cash in all or part of your private pension to which the COPE part is attached, then you won’t receive this extra income in the future, but it will still be shown on your state pension forecast. The figure provided in your pension forecast for this element of your pension is only an indicative amount and isn’t in any way guaranteed.
How can I boost my state pension?
Figures from the DWP show significant differences remain in the state pension. The average pension paid to men is £153.97 a week, compared to £126.72 paid to women. Many people, especially women, need to notify the DWP if they are caring for elderly relatives or grandchildren to ensure they claim any National Insurance credits. If you have gaps in your NI record, you can make voluntary contributions to increase your weekly pension but you need to weigh up the cost versus the increased income. Find out more via pensionsadvisoryservice.org.uk/about-pensions/the-state-pension/voluntary-ni-contributions
Want to carry on working after retirement age? Consider deferring your state pension. You have to do this for at least nine weeks. Every nine weeks equals a 1 percent increase, just under 5.8 percent for each year.
If you fear your state pension will not provide enough income, saving into a private pension is the most efficient way to build up retirement funds, because you get tax relief on your contributions, and if you have an employer, they will have to pay in too. Consider these incentives as turbo-charging your savings pot.