Creating a level playing field? The Flat Rate State Pension explained

The UK State Pension is an essential building block in planning for retirement, and Innes Reid’s advice process always takes this valuable source of retirement income in to account. From 6th April 2016 the way our entitlement to a State Pension is calculated will be changing, and this will have an impact on all UK taxpayers.

Who is affected?

Due to the ongoing changes to equalise State Pension Age (SPA) for males and females, whether you are affected depends on your gender and date of birth. The changes will affect:

  • Males born after 6th April 1951
  • Females born after 6th April 1953

What does it mean?

Under the current rules, each individual’s State Pension consists of a number of elements: Basic State Pension, SERPS, Second State Pension or S2P, graduated pension, and so on. The calculations are complex, and the amount of State Pension each individual is entitled to is unique based on their working career. The current system can also create inequalities.

The government hopes that changing to a Flat Rate (or ‘single tier’) State Pension will make the system ‘simpler’ and ‘fairer’, though it is difficult to see how this will work in practice now that more details have been made available.

How will it work?

Firstly, to qualify for a Flat Rate State Pension you will need at least 10 qualifying years on your National Insurance record. This need not be 10 consecutive years, and can combine contributions through employment and credits when taking time off work, for example to bring up a family.

Each qualifying year entitles you to £4.44 per week Flat Rate State Pension when you reach your State Pension Age. If you have the maximum of 35 qualifying years when you reach your SPA you will receive a Flat Rate State Pension of £155.65 per week (i.e. £4.44 X 35, with an element of ‘rounding’).

However, if you have been contracted out of SERPS in the past, your Flat Rate State Pension will be reduced by ‘a rebate-driven amount’ to reflect the fact that you paid lower rates of National Insurance in any year you were contracted out.

When will I receive it?

For most UK taxpayers the State Pension Age will be between age 65 and age 67, though there are plans to change this to age 68 for individuals born after 6th April 1977. There are likely to be further changes in future.

You can find out your State Pension Age here: https://www.gov.uk/state-pension-age

Will I be better off?

The government is not increasing the overall budget available to meet the cost of State Pensions, it is simply re-distributing the budget in what it considers to be a fairer way. There will be groups of pensioners who will see their State Pension increase (for example, the self-employed or parents who have taken time off work to bring up a family), and other groups who will receive less (for example, those who have contracted out of SERPS for a large part of their careers).

What about the old rules?

There are transitional arrangements to protect the State Pension entitlement of individuals who would have been better off under the current rules. The Department of Work and Pensions (DWP) will calculate whether you would be better off under the old rules or the new Flat Rate rules. The higher amount of the two will be your “foundation amount”, and this will be protected (with inflation based increases) until you reach your State Pension Age.

Can I increase my State Pension?

If you do not have sufficient qualifying years to claim a full Flat Rate State Pension you can make voluntary Class 3 National Insurance Contributions. You may also qualify for Pension Credit.

Unfortunately, once you reach the maximum of 35 qualifying years maximum (and therefore cannot increase your State Pension) you still have to pay National Insurance Contributions until you reach your State Pension Age.

What else is changing?

Alongside the introduction of the Flat Rate State Pension the 6th April 2016 will also see the following changes:

  • New rules for deferring your State Pension
  • The end of contracting out
  • Changes to sharing State Pensions on divorce
  • Changes to State Benefits on death

Where can I find out more?

You can obtain a State Pension Statement by calling the Future Pension Centre on 0345 3000 168 or by using the online enquiry facility at the following website: https://www.gov.uk/future-pension-centre

To find out more about making the most of your State Pension entitlement and how it can help your overall retirement planning strategy, contact the pensions experts Innes Reid on 01244 347583.

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