New State Pension

New State Pension

From 6th April 2016, the new single tier State Pension (SP) will become payable to people reaching State Pension Age (SPA). This aims to simplify the mangled mass of state pensions which have accumulated over the decades although time will tell whether this objective is achieved!

The new SP is valued at £155.65 per week but you may be entitled to a higher figure if you have benefits worth more, or indeed less if, for example, you do not have the 35 years’ qualifying years required (30 years under the old regime). Years during which you ‘contracted-out’ of the top-up SP and contributed either a lower rate of National Insurance (NI) or had contributions refunded into a private pension may also affect your entitlement to the single tier pension.

Basically, when you come to take your benefits, there will be a calculation under the old system compared with that under the new one with the higher figure becoming your ‘starting amount’. You are able to obtain a forecast free from the DWP at www.gov.uk/state-pension-statement or on 0345 3000 168. Please note that the website is currently being ‘tested and improved’.

For those reaching SPA before 6th April 2016 with a shortfall below £155.65, they are allowed until April 2017  to make additional voluntary Class 3A NI contributions to make this good. The maximum extra pension which may be secured is £25 per week (or £1,300 per annum) which would cost £22,250 for a 65 year old. Although this may seem a high figure, the additional pension represents an inflation proofed  yield of over 5.8%, significantly greater than an equivalent annuity rate.

An interesting question is whether you should defer taking the SP. For people qualifying for the SP from 6th April 2016, the rate at which your pension will increase with each year of deferral is 5.8%, quite a significant reduction on the 10.4% rate for those having reached SPA beforehand. Unfortunately, under the new system deferring the pension and taking a lump sum in lieu of the increase in pension due, is no longer an option. So deferral has become much less attractive than it was and whether it is viable will depend on individual circumstances.

We will see how things pan out with the new single tier pension. There are bound to be further queries as things  unravel and we will keep you posted on any interesting developments.