“The only thing that’s changed is everything”
When Apple launched the 9th generation of their iPhone in 2015, they chose to use the marketing caption: “The only thing that’s changed is everything”. I suspect this may have been something to do with their falling iPhone sales, as more and more customers start to wonder why they should upgrade to the latest iPhone. Despite the captivating caption, any improvements would best be described as ‘evolution’, rather than ‘revolution’.
This caption would be put to better use with the upcoming changes to the State Pension, which are revolutionary, but not necessarily for the better. So what’s changing, why is it changing and how does it affect you?
Well, to understand the changes, it’s worth knowing that the current State Pension is complicated. First you have your Basic State Pension, then there’s the Additional State Pension, which is made up of Graduated Pension, State Earnings Related Pension (SERPS), oh, and not forgetting State Second Pension (S2P)… Blurgh!
Mind you, with the current State Pension, you only need 30 qualifying years of National Insurance Contributions (NICs) to get the maximum Basic State Pension of £119.30 pw (£6,204 pa). When you include the maximum Additional State Pension of £164.36 pw (£8,547 pa), you can receive anything up to £283.66 pw (£14,750 pa).
Also, with the current State Pension, an individual can apply to top-up their State Pension by up to £25 pw (£1,300 pa) by making a ‘Class 3A Voluntary Contribution’. This is known as State Pension Top-up, but this won’t be available with the new State Pension. For more info on State Pension Top-up go to: gov.uk/state-pension-topup.
These layers of complexity have accumulated over many decades of successive Governments that have introduced various changes to State Pensions. As you can imagine, calculating your entitlement and planning for retirement with all of these, on top of any Final Salary or Personal Pensions, can be difficult to say the least.
To help address this, the State Pension will be changing on 6 April 2016 for people who reach State Pension Age on or after that date. This affects men born on or after 6 April 1951 and women born on or after 6 April 1953. To find out your State Pension Age go to: gov.uk/state-pension-age.
The new State Pension will be single-tier. This means, that instead of having lots of complicated layers, there will be just one flat-rate State Pension. Sounds great, doesn’t it?! Well, not exactly. By comparison, the new maximum State Pension now requires 35 qualifying years and will only be £155.65 pw (£8,084 pa). Although some aspects of the current State Pension have been simplified, not only is it reducing and you need to work longer, but if you look under the bonnet there are some other changes you ought to be aware of.
For those who are approaching their State Pension Age, the Department for Work and Pensions (DWP) will be carrying out calculations comparing the current State Pension versus the new State Pension, assuming the new State Pension had been in place their whole working life. This will help to ensure that these individuals are no worse off in monetary terms. For example, if an individual had built up a significant Additional State Pension, then they would get a higher ‘Starting Amount’.
So why is it changing? Well, the bottom line is that we’re living longer than ever before and State Pensions, which are guaranteed for life, cost the Government more and more every year. A recent report published by Public Health England said that for people in England aged 65, on average men can expect to live for another 19 years (84) and women a further 20 years (85). What’s even more concerning for the Government is that our longevity is forecast to continue rising.
In the often-uncertain world of finance and economics, one thing we’ve learned over the years is that providing any type of guarantee costs money, lots of money. This is why we’ve seen employers make a strategic shift from Final Salary pensions (with guarantees linked to earnings and inflation for life) to Money Purchase pensions (with no guarantees).
Not only are we living longer, the Government has somewhat snookered itself with the well-intended ‘Triple Lock’ Guarantee. It was introduced by the Coalition back in 2010 and was designed to protect pensioners against inflation. It is a guarantee to increase the State Pension every year by the greater of:
- Average earnings
This is great news for pensioners, but bad news for the Government. It means that if you were to toss a coin at the end of each year and it’s heads, the pensioner wins. However, if it’s tails, the pensioner also wins. The pensioner even wins if you can’t see where the coin rolled off the table! Despite this, David Cameron has pledged that the ‘Triple Lock’ Guarantee will be protected until 2020.
So how does all this affect you? Well, one clear benefit is that the calculations are now simpler than they were before making it easier to plan for your retirement.
Looking at the downsides, under the current State Pension, you only needed 1 qualifying year to ‘qualify’ for the minimum Basic State Pension or 30 qualifying years to get the maximum. With the new State Pension, you will now require at least 10 qualifying years to get the minimum but as many as 35 qualifying years to get the maximum. A qualifying year is simply a year when you have paid sufficient National Insurance Contributions (NICs).
One of the most fundamental changes is the treatment of State Pensions upon death. With the current State Pension, a widow or widower could inherit their late spouse’s State Pension. With the new State Pension, spouses can no longer inherit a State Pension. This is really significant, especially for women who may have not been able to accrue many qualifying years during their working life for their own State Pension provision.
In summary, the new Single-Tier State Pension will be for people who reach State Pension Age on or after 6 April 2016 and will now be up to a maximum of £155.65 pw (£8,094 pa), subject to a comparison calculation.
- The new State Pension is more simple to understand with a single-tier, rather than multiple layers of calculations.
- The ‘Triple Lock’ Guarantee is pledged to be kept until 2020, which guarantees annual increases at the greater of; inflation, average earnings or 2.5%.
- The maximum total State Pension is reducing from £283.66 pw to £155.65 pw (subject to a comparison calculation).
- Widows or Widowers will no longer be able to inherit their late spouse’s State Pension.
- Instead of only 1 year, now at least 10 qualifying years will be required to get the minimum State Pension.
- Instead of only 30 years, now 35 qualifying years will be required to get the maximum State Pension.
- No option to top-up your State Pension with a ‘Class 3A Voluntary Contribution’.
If you’re a client of Quadrant Group and would like to find out how much State Pension you’ll be entitled to, speak with your Financial Planner. Alternatively, you can complete a State Pension Statement form (BR19) and send this to the Future Pension Centre at the Department for Work and Pensions (DWP) or go to: gov.uk/state-pension-statement.
In conclusion, there are always things you can’t control, some things you can control and others you merely have influence over. Unfortunately, we cannot control the changes to the State Pension. However, understanding these changes and, more importantly, understanding the impact on you and your family will help you to plan, influence and control the things you can.
If these changes affect you, we’d strongly recommend that you review your retirement plans with your Financial Planner and assess the impact on you and your family, so that you can adapt your financial plan where necessary.
Remember, the only thing that’s changed is everything.
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.