For many, retirement brings a whole new chapter to their life. For others it can be something they only start to think about when the time arrives. But all of us, regardless of our age and background should take note of the new state pension rules, as taking steps now can ensure we do not come unstuck and receive less state pension then we believe we deserve.
New state pension legislation comes into effect from 6th April 2016 and will affect men born on or after 6 April 1951 and women born on or after 6 April 1953.
The new state pension value will be set in autumn 2015 – but should not be less than £148.40 per week as a maximum limit. The value of the state pension you receive will depend on the number of qualifying national insurance years you have earned [see below for definition] divided by 35 and multiplied by the maximum state pension available. For example, if you work and make 35 years of qualifying national insurance contributions, then under the new legislation due to come into effect you will be entitled to the full state pension. Important Note: if you do not make the minimum contribution of 10 years then you will not be entitled to the minimum state pension.
Deferral of state pension
Under the current draft of legislation if you were to defer your state pension by 9 weeks then you will get an additional 1% per year. Hence if you were to defer collection of your state pension for a full year then this will equate to an additional 5.8% per year to your weekly entitlement as described above.
National insurance contributions pre 6 April 2016
Your starting state pension amount will be the higher of your current entitlement under the present rules and the amount you be entitled to under the new rules had they been in place from the start of your working life. (This can be obtained by requesting your national insurance record from HMRC by completing the required form, (see appendix at the bottom of this article*). If the starting amount is greater than the new state pension, then this additional amount will be protected and paid in addition to the new statement pension you are eligible for, which will increase each year. While it is not stated this increase may follow the current policy of the highest of growth in average earnings or price increase (CPI) or 2.5%.
Contributions post 6 April 2016
Post 6 April 2016 any additional years of qualifying national contributions will increase your state pension entitlement up to a total 35 years (both pre and post 6 April 2016), which will give the maximum state pension entitlement plus any protected amounts which you may be entitled to.
Qualifying years and national insurance credits
In order to gain a qualifying year you will need to have earned £153 per week from one employer (£7,956 per year). You earn qualifying years if you are self-employed and paying class 2 and 4 national insurance as appropriate.
National insurance credits can also be earned if you look after and care for a child under the age of 12. The full list can be found on this website:-
Inheriting or increasing state pension from a spouse
Under the current draft of legislation you can inherit part of your deceased partner’s additional state pension if your marriage or civil partnership started before 6 April 2016 and one of the following apply:
- Your partner reached state pension age before 6 April 2016.
- They died before 6 April 2016 but would have reached state pension age on or after that date.
Inheriting a protected payment
You can inherit half of your partners protected payment (if applicable as described above) if their state pension age is on or after 6 April 2016 and they die on or after 6 April 2016.
Inheriting extra state pension or a lump sum
You may inherit part or all of your partner’s extra state pension or lump sum if:
- They died while they were deferring their state pension (before claiming) or they had started claiming it after deferring and
- They reached state pension age before 6 April 2016 (for current pension rules) or
- They reached state pension age after 6 April 2016 for new pension rules on deferment and
- You were married or in the civil partnership when they died
Also worth noting, if you are considering drawing your full personal pension pot (not state), from 6 April 2015 note only 25% will be a tax free as a lump sum. Any additional amounts withdrawn are taxed as employment income in the year it is taken.
Please note that the above is based on the current draft of the pension legislation which will be finalised later in 2015 and come into effect on 6 April 2016. However, the mechanisms for calculations described above are unlikely to change before then. We will post an update when the legislation has been finalised as this information is designed to provide early notice of the changes.
Our view on this new legislation is as follows:-
Please contact HMRC to review your current number of qualifying years to know where you stand right now. If you are missing any of the previous 6 years, then can make voluntary contributions. Remember we are the first “centenary generation” where more and more of us will live to the landmark age of 100 and therefore planning now for an extended life is important. In summary don’t wait, start planning now!
Please feel free to contact us or further information regarding the points raised in this bulletin.
Link for requesting national insurance contribution years from HMRC: