It’s that time of year when we excitedly compile our New Year’s resolutions. Popular choices may include plans to get fit, become more organised, find a new job or perhaps even get to grips with our financial affairs.
As a professional woman in Financial Services, my New Year’s resolution was to revisit my life plan, to see what impact the new changes in the State Pension, amongst other things, could have on my retirement! Will I be better off? Will I need to save more if the rules do not work in my favour? Media coverage seems to suggest women will be worse off!
The current ‘two-tier’ State system is based upon a weekly basic pension, topped up with benefits from additional earnings-related payments; some will know this as SERPS. This is to be phased out from April 2016 and replaced with a basic ‘flat rate’ pension. The current system is based on the more traditional family set up of the husband going out to work and the woman staying at home to look after the children or returning to work part time.
Under the new system, it will no longer be possible for a non-working spouse to draw a State pension based on the working spouse’s National Insurance Contributions (NICs). However, the good news is that those who have chosen to stay at home to raise children or care for an elderly relative will, for the first time, receive NIC credits as if they were employed. For many women, reliance on their husbands’ NICs will be a thing of the past! At last there really will be recognition for the efforts of hard working families!
From April 2016, the new flat-rate State pension for men born on or after 6 April 1953 and women born on or after 6 April 1951 will be £148.60 per week (subject to final calculation in Autumn 2015), to replace the existing system. Some people will be worse off as they could qualify for a higher payment under the current regime. For further details and example case studies, check this government fact sheet.
Although the new flat rate pension is more generous than the current one, it will take longer to qualify, as the number of qualifying years will be increased from 30 to 35. To claim any new State pension you will have to have paid NICs for at least 10 years. So it is likely that one in five of us who retire after 6 April 2016 will not have built up enough National Insurance credits to benefit from the full State pension in retirement.
Furthermore, according to official data, it is estimated that less than half of the two million people due to retire between 2016 and 2020 will receive the full flat-rate State pension of £148.40 per week either because they ‘contracted out’ of the second tier pension at some point during their working lives, interrupted National Insurance contributions if they took time out of working life to raise children, or they became self-employed.
The new State pension will ultimately be simpler and fairer. However, in the short term, many people are likely to receive less than they may be expecting.
Looking at my own circumstances, I should have 35 qualifying years by the time I reach 55 and I should be entitled to the full basic State pension at the age of 68, based on current legislation. When I first started to map out my life plan, the State pension age for women was 60 and over the years this has increased to 68. I wonder where it will actually be when I come to retire? Will the State pension even be around? I am one of the fortunate few who have benefited from the use of ‘Lifetime Cashflow Planning‘. It has enabled me to create a financial plan and if I continue to make additional pension contributions and savings into NISAs, my life plan is on track to fulfil my goals and I should have sufficient income in retirement.
It is however essential that I continually review my plan, to reflect any changes to my own personal circumstances and of course adapt to an ever changing world.
We all worry about money and what the future may hold. Life-long financial planning really is the key to sorting it all out. The Quadrant Wealth Partnership proposition is designed to help give you a clear picture of the financial road ahead. Why not make it your New Year’s resolution to contact us at The Quadrant Group and get your financial affairs in shape for 2015 and for the future.
—
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.
