Flat Rate State Pension: The Small Print3rd February 2016
Simpler, fairer and more generous. £155.65 per week. At the first glance, there is not much to dislike about the new single tier State Pension. Nevertheless, although the reform is generally a step in the right direction, there are some ifs and buts which some people are not aware of.
Not Everyone Will Get the Full Amount
The frequently quoted headline figure of £155.65 per week, together with the slightly unfortunate wording “flat rate” or “single tier”, could make one believe that everybody will get the same amount. Unfortunately this is not the case. The headline amount should be considered an ideal scenario, as long as all conditions are met. Depending on your circumstances, you may end up receiving much less when you retire. It will mostly depend on two particular factors: qualifying years and contracting out.
In general, in order to receive State Pension you must have contributed to the system for an extended period of time. You will need at least 35 years of National Insurance contributions (or credits) to qualify for the full amount. If you end up having less (for instance if you have lived and worked abroad), you will get a lower, prorated amount. To be eligible at all you need at least 10 qualifying years.
The concept of qualifying years is not new. Until now the two above mentioned thresholds have been 30 years and just one year, respectively. The new State Pension is stricter in this regard.
If you are not sure whether you are on track for the full State Pension, you may want to check your National Insurance contributions (NICs) record. In some cases you might be able to pay voluntary NICs in order to fill the gaps and increase the number of qualifying years.
Spouses and Partners
Besides the number of years, the reform will also change the way how your spouse or civil partner’s State Pension and qualifying years may affect your State Pension. In line with the simplification objective, there is a clear trend towards elimination of the various special rules applying to marriage, divorce or bereavement. Going forward your State Pension will only depend on your own National Insurance records, although there are transitional provisions (more details here).
Contracted Out Deduction
Some of the most frequently asked questions about the single tier State Pension are coming from those who have contracted out under the existing system, wondering whether and how this will be reflected under the new rules.
It is quite complex and subject to individual circumstances. The exact deduction will depend not only on the total number of years when you contracted out, but also on the timing (in which period), as the rules changed over time.
That said, the short answer is yes, it will be reflected. If you have contracted out for extended periods of time under the old system, you will most likely receive less than the headline full amount under the new State Pension. However, you will not get less than you would if the old rules remained in place.
Update Your Retirement Planning Strategy
In the recent years and months, the Government has introduced dramatic changes to British pensions. Not only the State Pension, but also the legislation governing private pensions has completely changed. On the one hand there are new pension freedoms and more favourable treatment of death benefits. On the other hand the lifetime allowance, as well as the annual pension contribution allowances, has decreased.
This all means that old retirement planning strategies may be less than optimal today and may result in unnecessary tax liabilities, insufficient retirement income or other bad surprises. If you don’t do regular reviews of your retirement savings (as we always say you should), now is a good time to do an irregular one. One thing that the old and the new State Pension have in common is that neither is supposed to work as a sole source of income and even the full amount won’t be enough to cover most people’s living costs.Share: