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What do state pension changes mean for me?

Jenny Ives, Senior Financial Planner and our expert in Later Life finance, looks at changes in the State Pension and how you can improve your own ‘pot’

The latest round of state pension changes were implemented on 6 April 2016 and this October the Department of Works and Pensions (DWP) launched another consultation on state pension age, which is set to run to the end of the year. Its purpose is to ensure the state pension age ‘remains affordable and fair for all’.

The state pension is a valuable source of income for many in retirement so it’s no surprise that the action group WASPI (Women Against State Pension Inequality) has gained significant support for women born in the 1950s who have found that their state pension age was raised with little personal warning and thus insufficient time to make alternative plans. For these women and their families, this represents thousands of pounds of lost income they expected in retirement.

What do the changes mean to you?
The recent changes sought to simplify the state pension to a single tier system, set at £155.65 per week. If you had ‘contracted-out’ of the state pension then you may receive a little less. The ‘triple lock’ increase still applies, which ensures the state pension increases each year by either inflation, earnings growth or 2.5%, whichever is the highest. However the cost of the ‘triple lock guarantee’ is significant and its removal is to be reviewed during the DWP consultation.

In addition you will now need 35 years of national insurance contributions paid or credited to you to qualify for a ‘full’ state pension: if you have less than 10 years’ worth, you won’t be in line for any state pension…

Take active steps now
However if you haven’t reached state pension age yet, you can increase your qualifying years by making voluntary National Insurance (Class 3) contributions. For around £700 you could buy extra state pension of £224 per year that broadly keeps pace with inflation (based on Voluntary Class 3 rate weekly payments of £13.25 for a year). In just over three years of receiving state pension, you’d get your money back – a potential return on your investment of 32% p.a. -you won’t get that from a bank these days!

So, what should you do next?
While just over half the respondents to an Office of National Statistics survey* said their main reason for working beyond state pension age was that ‘they weren’t ready to stop working’, nearly a third of the respondents needed to carry on to meet essential outgoings, pay for holidays or top up their pension pots.

Get savvy about the state of your state pension and request a forecast, which will indicate if you have ‘missing NICs’ and the cost to purchase additional years if applicable. There are time limits so don’t delay in checking.
Handy online tools are available here to check your state pension age and also how much state pension you can expect here. You can also apply by phone or post.

If you had Home Responsibilities Protection (before April 2010) as a carer, receive Child Benefit payments or Income Support carefully check that your National Insurance contribution records are correct and if in doubt, contact the HMRC National Insurance Helpline on 0300 200 3500.

We advise you take financial planning advice to ensure you live the life you want in retirement, as the state pension may not prove sufficient.

  • ONS Reference number: 005745