Changes to the UK State Pension system - Acumen Financial

Changes to the UK State Pension system

There has been a lot of newspaper inches devoted to the new state pension announced by the Coalition Government – much is positive but as always seems to be the case there are a lot of questions raised so in this blog we will try to explain a little about what is happening.

What’s new?

At the present time, the basic state pension of £107.45 can be increased with additional benefits to a maximum of £142.70. A flat rate pension of £144 a week is planned with a  ‘triple lock guarantee’ (the higher of CPI, Earnings and 2.5%) ensuring it increases year by year and this will then replace the current,tiered system. The new flat rate pension will be introduced in 2017 at the earliest – so far, so good.

Under the new scheme, you will need a minimum of 35 qualifying years’ worth of national insurance contributions (NICs) rather than the current 30 years, to receive the full amount.

You will still be allowed to defer claiming your state pension once you reach state pension age in order to receive a higher weekly amount when you do start claiming but you won’t be able to claim the deferred pension as a lump sum which you are currently able to do.

The new flat rate payment is designed to simplify state pensions and make it easier for people to work out what they will be entitled to.

Winners and losers

Low earners – and many of them are women – will be winners under the new system as will the self employed. These groups have historically done badly under the current system finding it difficult to build up adequate contributions so it’s good news for them.

Anyone who has not reached state pension age in 2017 and who has built up more than £144 from the state and second tier pension (eg SERPS or S2P) will keep their higher pension and from then on they will then get ‘split indexation’ –  that is to say, £144 will go up in line with the triple lock,  the rest will go up in line with CPI.

The independent Institute for Fiscal Studies (IFS) has argued that, while those reaching state pension age before 2060 would be better off under the reforms, those retiring at or after this date would be worse off than they are now.

Do the changes affect other pension schemes?

Members of contracted out pension schemes – typically NHS workers, teachers, civil servants,police and other public service schemes as well as some large employer pension schemes- will see that their NICs increase as the Government brings the contracted out pension scheme option to an end. In the past, contracting out meant there was a discount on NICs but the reduced contributions paid by members of these schemes will soon revert to the full amount and so, for example , someone earning £25,000 per year will pay an extra £270 a year in national insurance contributions.

So will it still be worth the money?

Emphatically YES. Despite the media coverage, which so often invites us to scorn the State Pension, and comments from others who suggest that the ‘gold plated’ public sector pensions are not all they are cracked up to be, there is absolutely no doubt that £ for £ these pensions are well worth what we are asked to pay for them and more.

The higher earning public sector workers will be asked to increase their contributions and some will doubtless feel aggrieved about that but it will still be a far, far better deal than the self employed or private sector employees could hope for.The highest pension funds regardless of whether they are in the public or private sector are being capped at £1.25m from April 2014.

I have heard claims the Teachers/NHS and other public sector pension schemes are ‘fully funded’ and so don’t need any extra contributions from their members are very misleading not least because there is no fund.

These are ‘pay as you go ‘ schemes and what is being overlooked is the fact that the current working generation whose contributions pay today for the benefits that are paid out tomorrow will soon be retiring and as they do so their replacements in the working population will be fewer in number. Somehow the maths won’t work, fewer people paying in…more people drawing out…so we have to accept that change is coming and we all need to plan for it.

The danger is that all this negative spin discourages people from joining their employers’ pension scheme or creates an atmosphere where they feel it would be better to opt out when in fact the opposite is far more likely to be the case.

So, if in doubt, seek advice. We all need to protect and take responsibility for our own future financial security – today’s newspapers are still only tomorrow’s fish and chip wrappings after all.

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