Personal Finance

State pension changes: everything you need to know

If you are approaching retirement the chances are you don’t know how much your state pension is going to be. Alongside confusion about whether you qualify for state pension, and the age at which you can expect to get it many people do not understand the radical reforms coming in next April.

A survey by Saga found that a third of over 50s have no idea if they will be better or worse off when the new flat-rate state pension comes into effect in April 2016.

“Our research shows great confusion about changes to the state pension,” says Saga’s Paul Green. “Whilst there are a minority of people who are savvy and know how to make the most of what is on offer, it should not just be for the savvy few to benefit. The Government needs to do much more to raise awareness of the ways that people can boost their state pension.”

A new single rate

The big change that is happening from April is that the state pension is being simplified. Everyone who qualifies for the benefit will receive the same amount, unlike at the moment where several groups get paid different sums.

The means-tested elements of the state pension known as the Second State Pension (Serps) and the Pension Credit are being abolished. Instead there will be a universal payment for everyone who has hit state pension age and has made 35 years of National Insurance contributions.

At present the maximum you can receive before the mean-tested benefits are added is £115.95 a week. Under the new system everyone who qualifies for the full state pension will receive at least £151.25 per week.

This will benefit the low-paid, self-employed and people who have spent periods out of work in particular. That’s because in the past these groups didn’t build enough National Insurance credits to qualify for the state second pension so missed out on that higher income level. Now all their credits go towards the single tier system so they will receive a bigger income.

However, the opposite is true for high earners. Under the new system they won’t be able to build up credits towards Serps meaning they will only receive the flat-rate instead.

This is widely misunderstood with Saga’s research revealing that just 28 per cent of low earners realise the new system will leave them better off. Meanwhile, 36 per cent of high earners mistakenly believe they will receive more from the flat-rate pension than they would currently.

Give yourself a pension boost

Another area causing confusion is state pension top-ups. Only 7 per cent of the people surveyed by Saga knew how to go about making extra National Insurance payments to secure a better state pension.

If you are going to have made less than 35 years of National Insurance contributions when your retire after April 2016 then you can buy additional credits. This can make a big difference to how much you receive in retirement. It isn’t cheap to buy top-ups so you need to weigh up how much you stand to gain over the length of your retirement and how much income you will receive from other sources such as a private pension.

You can also buy additional National Insurance credits if you will qualify for the state pension before April 2016. Find out more on the government’s pension website here. 

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