Confused about how the state pension is changing? Wondering what it means for you? Our latest research shows you’re not alone – so here’s a simple guide to the main things you need to know.
In April 2016, the current state pension system will change, affecting millions of people across the UK. Despite this, our Real Retirement Report has found more than a quarter of people aged 55-64 are completely unaware of what’s changing, and many others are uncertain if and how it affects them.
Here are seven of the most important things to know about the ‘new state pension’.
1. Two pensions are being merged into one
At the moment in the UK, we have a two-tier state pension system. There’s a basic state pension, which is currently £115.95 a week. Then there’s also something called the ‘additional state pension’ (also known as the State Second Pension or SERPS), which is based on your earnings and tops up the basic state pension.
In April 2016, these two state pensions will be merged into one. And this is what’s known as the ‘new state pension’.
2. It applies to you if you’ll reach state pension age from 6 April 2016
The new state pension will apply to you if you reach state pension age on or after 6 April 2016. This means it applies to women born on or after 6 April 1953 and men born on or after 6 April 1951. If you reach state pension age before 6 April 2016 then the changes to the state pension won’t affect you.
It’s worth noting that, from 6 April 2016, you'll usually need at least 10 years’ worth of National Insurance contributions or credits to get the new state pension.
3. The ‘full’ new state pension will be £155.65 a week
In his Autumn Statement in November 2015, the Chancellor, George Osborne, announced that the full new state pension will be £155.65 a week when it first comes in. That’s the equivalent of £8,093.80 a year or £674.48 a month.
Assuming you’ll reach state pension age after 6 April 2016, you’ll be given a ‘starting amount’ for your new state pension. This figure will be whatever is higher of: a) the amount you’d have received under the old system; or b) the amount you’d get if the new system had been in force for your whole working life.
4. You may get less than this…
One important thing to note is that in some situations your starting amount could be less than the ‘full’ £155.65 a week.
This could happen if you don’t have 35 years’ or more worth of National Insurance contributions or credits – or if you’ve spent part of your working life ‘contracted out’. This is where employees were allowed to opt out (or ‘contract out’) of the additional state pension scheme in exchange for lower National Insurance contributions. (If you work or have worked for a public sector organisation there’s a good chance you’ll have been contracted out at some point.)
The good news is that if your starting amount is less than £155.65 a week, you may be able to increase it (eg by paying voluntary National Insurance contributions) to add more qualifying years on your National Insurance record after 5 April 2016. You can do this until you reach the full new state pension amount or state pension age – whichever happens first.
Each qualifying year on your National Insurance record after 5 April 2016 will add about £4.44 a week to your new state pension.
5. … But you could get more!
The new rules will mean that nobody will lose any additional state pension they’ve accrued over the years. So if you haven’t been contracted out of the additional state pension and have 35 years or more of National Insurance contributions, your starting amount may actually be more than the full new state pension.
The difference between your starting amount and the full new state pension is called your ‘protected payment’. It’s paid on top of your new state pension, and increases each year in line with inflation.
6. The amount you get is likely to rise each year
Under current rules, the new state pension will rise each year in line with inflation, earnings growth or 2.5% – whichever is higher. This ‘triple lock’, as it is known, was introduced by the Conservative-Liberal Democrat coalition in 2010 to ensure pensioners’ living standards don’t fall behind the rest of society.
It’s worth noting that this is based on current regulations and may change in future.
7. And you can ‘defer’ your state pension to get more money later
Like most people, you’re probably aware that you can start receiving your state pension when you reach state pension age. The clue’s in the name, after all.
But what you may not realise is that you don’t have to claim it when you get to this age.
Instead, you can put off, or ‘defer’, receiving your state pension, which means that you may get extra when you do claim it. You have to defer for at least nine weeks, and your state pension will increase by 1% for every nine weeks you put off claiming.
As an example, if you were entitled to the full new state pension of £155.65 a week and deferred for 270 weeks (a little over five years), you’d receive an extra £46.69 every week. (You would not, of course, receive any state pension during the period you deferred for.)
What should I do next?
Here are some actions you may want to consider:
Get a state pension statement
You can get a state pension statement via gov.uk
Get current values for any private pensions you have
Contact your pension provider(s) to find out how much you have in any private pensions – including any personal pensions and workplace schemes you’ve been a member of.
Use My Retirement Planner
Aviva’s free My Retirement Planner tool estimates how much your private pension plans could be worth when you retire, and shows how you could use your pension plans and state pension to fund your retirement.