If you reach state pension age on or after 6th April 2016 then you will come under the rules for the new state pension. Here is a quick guide to what that means in practice.
Out with the old and in with the New State Pension – What exactly changes?
Under current rules the state pension is divided into two parts. These are the basic state pension and the additional state pension.
The basic state pension is calculated based on your national insurance record. The additional state pension is calculated based on your earnings.
It is currently possible to opt out of making payments towards the additional state pension. This is known as “contracting out”.
The new state pension will combine both the basic and additional state pensions. This single-tier pension system will only be based on your national insurance record. As a result, it will cease to be possible to opt out of making payments towards the additional state pension. Therefore those who are currently doing so may see their national insurance contributions being increased.
Will I qualify for the State Pension?
You will need 35 years of National Insurance contributions to qualify for the full new state pension. As a rule of thumb, you will need at least 10 years of NI contributions to qualify for any pension under the new rules.
There are, however, some exceptions to this. These are particularly likely to apply to married women or widows who chose to pay NI at a lower rate. If you are in this situation it is particularly worth checking whether you could qualify for the new state pension.
Those with more than the qualifying threshold but less than the maximum can expect to receive a partial new state pension. For example someone with 15 years of NI contributions will receive 15/35 of a full new state pension. Someone with 25 years will receive 25/35 of a new state pension and so on.
It should be noted that the gov.uk website has a pension calculator which anyone can use. At current time it is still being updated to reflect the changes caused by the new state pension. It can still, however, offer users a ballpark idea of where they stand.
Take steps to deal with a shortfall in your pension
Under current rules, you can buy extra credits for the state pension. This option only applies to those who reach state pension age before 6th April 2016. In other words you need to reach state pension age before the new state pension scheme starts. You may choose to defer receiving your pension until after the new state pension scheme is launched. Even so, however, your claim for a pension will still be treated under the old rules.
For those who will be treated under the new rules, there is another option. This is to volunteer to pay “Class 3” National Insurance Contributions. Basically these are used to fill gaps in your NI record. For example if you went to work or study abroad for a while, this time might be “missing” from your NI history. Ideally you should look at this option in the context of your overall financial plans, including your retirement plans. In particular you should check if increasing your state pension might reduce your entitlement to other benefits.
You can also look at the option of deferring your state pension. Each year you defer adds 5.8% to the value of your state pension. While this is a considerable reduction from the 10.4% on offer at the moment, it may still be useful.
One Final Point…
Remember you have to apply for pensions (both state and private). You should be contacted about this a few months before your retirement. If you are not, then you need to be proactive and contact your provider(s) yourself.