UK Flat-rate pensions Explained: However they are not coming until 2017 #UKPensionNews #IN
16 Wednesday Jan 2013
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Our state pensions are about to undergo their biggest transformation in a generation. Out will go the two-tier system of basic pension plus earnings-related top-ups; in will come a new single payment pitched at about £144 a week.
The change is being represented as a simplification, and certainly the existing system is incomprehensibly complex. But it’s not the case that everyone will get the same £144 a week in future: some will get more than this; others less. Here we look at how you are likely to be affected by the new scheme.
What is the new state pension?
The new system is described as “single tier” because the top-up state pension, which includes the state earnings-related pension scheme (Serps) and its successor, the state second pension, is being scrapped. When the new scheme takes effect, which will be in 2017 “at the earliest”, according to the Government, there will be just one component to the state pension – a payment of about £144 a week in today’s money, which is likely to have increased to about £160 by the time it is introduced.
Who will qualify?
To get the full amount, you will need to have made at least 35 years’ National Insurance contributions (NICs), a rise from the current 30 years. But people who have already retired when the new system is introduced will not qualify; they will keep their existing entitlements, which will often be less generous.
I’m due to retire in 2015. If I delay retirement, can I qualify for the new pension?
No. Entitlement to the flat rate will be determined by whether you have reached the state pension age at the time of its introduction. Choosing to defer drawing the pension won’t have any effect.
I was expecting a state pension higher than £144 because of my entitlement to Serps. What will I end up getting?
If you have built up an entitlement to a combined state pension of more than the flat rate, you will still get it. However, you will get less than you would have got had the existing system continued.
This is because no one will build up any more entitlements to the top-up pension after the flat rate is introduced – so someone due to retire in 2027, for example, would miss out on 10 years’ worth of top-up pension. But if by 2017 they have built up an entitlement to a weekly pension of £180, say, they will get that sum.
However, the part of the pension above the £144 flat rate will not be subject to the “triple lock” system for annual increases, by which pensions increase by the highest of wages, inflation or 2.5pc. The extra payment will rise in line with the consumer prices index only, so increases could be less than those paid on the “main” pension.
I won’t have 35 years’ NICs when I retire. What pension can I expect?
Many people won’t have a 35-year NI record, for example because they took time out of work or because they were “contracted out” of the top-up pension. Anyone in this position will have their single-tier pension reduced. If, say, you have 30 years’ of NI records and were never contracted out, you will get 30/35ths of the full flat rate. But if you were contracted out for some of those 30 years, you will see an additional, as yet unspecified, reduction in respect of that period.
Anyone with less than between seven and 10 years’ NICs will get nothing (the Government has yet to make a final decision). Under the current system, even a single year of contributions entitles you to some pension.
I’ve ‘bought’ extra NI years to bring me up to 30, to qualify for a full state pension. By the time I retire I’ll need 35. What can I do?
People who do not have a full record of NICs can in some circumstances “buy” them later in order to qualify for a full state pension – though normally you would need to do this within six years of the missing years. You can buy years even after you have retired, subject to the six-year rule.
This can be a good idea, though remember that anyone in deteriorating health might not get all their money back.
What will happen to the age at which I will get the state pension?
Under changes already announced, women will retire at 65 by 2018, then the state pension age for men and women will rise to 66 between 2018 and 2020. By 2026, it will rise to 67.
The Government will carry out a review of the state pension age every five years, but will not change it again in this parliament. The reviews will be based on the principle that people should receive the state pension for a specific proportion of their adult life. So, as life expectancy increases, the state pension age will also rise.
I belong to a final salary scheme. What can I expect?
Many final salary plans are contracted out. You will have to pay an extra 1.4pc of salary in NICs because contracting out will be abolished for final salary schemes when the new pension comes in. You should get a better state pension, although you are unlikely to get the full flat rate because of the years in which you did not make full NICs.
However, there are fears that the extra costs imposed on final salary schemes by the new system – employers will also have to increase their NI payments when contracting out is ended – may force more schemes to close.
Are there any other changes?
It will no longer be possible to defer taking your state pension in exchange for a lump sum, although you will still be able to delay it in exchange for a higher pension.
Expats Pensions Comments:
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