A recent report shows the new state pension announcement in October 2015 caused widespread confusion. Chris Bolton (Managing Director Retirement Solutions – Aviva UK Life) stated ‘Many over 55’s are confused or unaware of the changes to the state pension and how it will affect retirement’. According to an Aviva report, 27% of those approaching retirement (55-64 year olds) were completely unaware of the new state pension. Of those who were aware 42% were unsure if they would receive the full payment. It appears much of the confusion relates to the impact of opting out.
Back to the content of the announcement. You can claim the new state pension if you reach retirement age on, or after, 6 April 2016. It does not apply to men born before 6 April 1951 or women born before 6 April 1953 who will retain their existing payments. The weekly payment has increased to £155.61 but (here is where the confusion starts) this is a maximum dependent on the amount of National Insurance contributions made in a working lifetime. If you have had a significant break from paying contributions it will have an impact but by far the biggest issue is the impact of contracting out.
In 1978 a secondary element was added to the state pension. This was originally known as SERPS (State Earnings Related Pension Scheme) but its name was changed to S2P (State Second Pension) in 2002. In 1998 the Government provided an incentive for people to leave SERPS and pay a reduced national insurance contribution.
In 2012 the rules changed again and everyone was contracted back into S2P. If an individual contracted out when it was first introduced and stayed contracted out for 24 years they would have paid less than the full NI contribution over that period. Latest statistics show from those reaching retirement age in the next 20 years 80% will have opted out at some point.
The Department for Works and Pensions (DWP) will assume those that contracted out will have built up a private pension fund using the money that was not paid as National Insurance. They will make a calculation on how much this fund may be worth based on the opted out time period and then deduct this from the amount payable as the state pension.
The details of the calculation are not known and there is no appeal process. Early indications show an individual who stayed contracted out for the full term would receive approximately £3,000 per year less in state pension payments. The deduction will be more than the total of reduced NI contributions as a factor will be included to cover the expected growth of the opted out personal pension policy. The Government has however offered those nearing retirement the option to make a lump sum payment to top up their state pension entitlement.
Of course, if an individual’s contracting out personal pension has performed well it may cover the loss of state pension benefit. Much of the controversy relates to what the Government did (or did not) make clear at the point contracting out was introduced. Should you have any questions about the new state pension please give us a call on 0800 043 8341 or Email email@example.com
The information in this article does not constitute financial or other professional advice.