Do your retirement plans involve travelling the world or finally taking up a new hobby? Perhaps you have diligently set aside savings and contributed to a workplace scheme in the hope that the state pension will boost your income and allow you to follow your plans if these fall short.
Some people, however, may be in for nasty shocks if they took career breaks or time out of the system to care for loved ones. Rules have been changing around state pension entitlement, and the result is that you may get less at retirement than you are expecting.
Since April 2016, people must have 35 years’ of full national insurance contributions (NICs) to receive the new full flat-rate state pension of £155.65 a week – that’s five more years than under the previous system.
Les Cameron, retirement expert at Prudential, says: “The transition to the new state pension has made an already difficult area even more complex. Many people may be unaware of or confused about the impact of the changes on their personal situation.”
Anyone with fewer than 35 years of NICs will receive a reduced state pension. So if, for example, they have 30 qualifying years rather than 35, they will get at least 30/35ths of the full sum, or just over £133 a week. However, those with fewer than 10 years of NICs won’t qualify for a penny of state pension, although they may qualify for other benefits and financial support.
According to the Department for Work and Pensions, by 2020 85% of people reaching pension age will have at least 35 years of qualifying NICs.
- Your guide to the new state pension
National insurance credits
Don’t panic if you fear a gap in your record will mean you won’t have a full 35-year record of employment. You can build up some qualifying years without working through a system of NI credits.
“You may be granted a qualifying year automatically if you’re receiving child benefit, jobseeker’s allowance, working tax credits or the carer’s allowance, among other benefits,” says Nathan Long, senior pensions analyst at Hargreaves Lansdown.
If you are off sick and claiming employment support allowance, you will get a credit provided you satisfy the rules, which include being unfit for work and attending medical assessments. However, an army of people who care for loved ones but don’t receive carer’s allowance or have worked abroad for lengthy periods, or taken career breaks risk losing out. Other rule changes could also dent their retirement dreams.
State pension age
The state pension age is rising at breakneck speed. Jumps in life expectancy are blamed for the rise, with the Treasury claiming it is unable to afford the cost of state pensions without these increases.
For many years, the state pension age for men was 65 and the age for women 60. In 1995 the government announced that the state pension age for women would rise to gradually bring the qualifying age for women in line with that of men by 2020.
From 2020 both men and women will have to wait until they are 66 before they can claim their state pensions. From 2028 they will have to wait until they are 67. The qualifying age is expected to continue rising along with life expectancy and be reviewed every six years from May 2017.
Alistair McQueen, savings and retirement manager at Aviva, says: “With our state pension age rising towards 70, we can expect more than 45 years of working life. The state pension requirement is set at 35 years of national insurance contributions to allow for a period of 10 years when we’re not building credits.”
However, he adds: “The UK state pension system is one of the oldest in the world, but over the years it has also become one of the most complicated. The recent reforms were designed to make things simpler, but subtleties and complexities persist.”
- Personal pensions: a guide
Check your entitlement
Rather than try to calculate your entitlement yourself, check your NIC record using the government’s service to see if you have any gaps. “The system is complex, so trying to second-guess your entitlement is impossible,” says Mr Long.
You can check your NIC record online at gov.uk/check-national-insurance-record. To check how much state pension you could get at retirement, apply for a pension statement at gov.uk/check-state-pension, or call the government’s Future Pension Centre, on 0345 3000 168.
You can also get information from charity Age UK by calling 0800 169 6565. “The sooner people find out how they will be affected, the sooner they can start making realistic plans for retirement,” says Caroline Abrahams, charity director at Age UK.
Filling gaps in your record
You may be able to fill gaps in your record by making voluntary class 3 NICs. If you are soon to retire and find you are missing years, you can pay around £733 for a year’s worth of NICs. Each year of voluntary NICs paid from April 2016 will add 1/35th of the full flat-rate state pension, or around £4.45 a week, to your pension for the rest of your life. You can find more information at gov.uk/voluntary-national-insurance-contributions.
On the face of it, this is great value. You pay a lump sum of around £733, and in return get a boost of around £230 a year to your state pension for as long as you live. Provided you live for four years or more into retirement, you would make a profit on your contribution.
An added advantage is that the state pension should rise each year. It is currently protected against inflation by a ‘triple lock’ that links the state pension to inflation, wage growth or 2.5%, whichever is the highest.
You can typically make voluntary contributions for any of the previous six years if you find gaps. So, for example, in the tax year 2016-17 you could make voluntary NICs going back to 2010-11.
However, Mr Long warns: “If you have built up a qualifying year for each of the past six years, catching up for years before then is not usually possible. So people who have big gaps early on in their career or while studying and are now working may be unable to pay voluntary NICs.”
Separate Class 3A NICs are an additional way to top of your state pension for those who reached state pension age before 6 April 2016. This 'state pension top up' scheme runs until 5 April 2017.
If you are wondering whether it is worth filling the gaps or not, consider your health and whether you can afford to part with cash to top up your NIC record. You should also consider the you’ll be paying for the extra contributions with taxed savings, but you may need to pay tax again on extra income you receive. In some circumstances, if you have other sources of income, an extra contribution to a state pension could push you into a higher tax band.
The Department for Work and Pensions stresses that whether you will benefit from filling in gaps also depends on whether you were contracted out under the previous state second pension – also known as the additional state pension. This was abolished when the new flat-rate state pension was introduced in April 2016.
People may not find filling in gaps worthwhile because they have built up additional state pension and are already eligible for more than the full flat rate of £155.65 a week. Check your NIC record and speak to an HMRC adviser to see if you would benefit from making voluntary contributions to fill gaps.
You can also increase your state pension by deferring it. “At retirement, it’s important to consider all available options to boost your retirement income,” says Mr Cameron. “This includes voluntary NICs, class 3A NICs and deferring your state pension.” If you reach state pension age after 6 April 2016, you can boost your pension by 1% for every nine weeks you defer claiming. This works out as an increase of just under 5.8% a year.
However, starting to consider your retirement plans early is always the best option. Moneywise columnist Jeff Prestridge argues that you shouldn't rely on the state pension to fund your retirement. Mr Cameron says: “The new state pension represents a third of current average earnings, so further retirement savings will be required to ensure your income lives up to expectations.” Mr Long adds: “Targeting contributions of around 15% of salary each year into pension schemes should keep most people on track.” However, the average contribution to a workplace pension is just 4% so you might need to consider topping this up with suplementary pension savings.
“I’ll buy the extra years when I’ve got cash to spare”
Jan Hunter, 61, (pictured above) has been financially hit by the changes to the state pension rules. The former clerk for Derby City Council was hoping to retire at age 60. She was “shocked” to find she now has to wait until she is 66 to get the state pension.
She received a letter in 2013 telling her about the rise in the state pension age for women to 66. At this stage, she had sufficient NICs to get the full sum, despite taking time out of work to raise her two children. “But the government tinkered with these rules too a few years later, so I’ve been hit twice,” she says.
Jan, from Alnwick, Northumberland, has around 32 years’ worth of NICs. This was enough to entitle her to a full state pension when the number of years of contributions required was 30 under the previous basic state pension system. “But now,” she says, “this has been raised to 35 – so I’m missing several years.”
She is currently relying on her husband’s earnings to fund retirement and looking into topping up her record. “This will cost several thousand pounds, but I’ll need the extra income, so I’m likely to buy the extra years when I’ve got cash to spare. I’ve got several more years to top up my record.”
She adds: “I’ve paid into the system whenever possible, and I’m angry that the government keeps changing the rules and failing to inform people. I will lose tens of thousands of pounds in income because of this.”
Jan is a member of the campaign group Women Against State Pension Inequality (WASPI), which is campaigning for a better deal for women affected by the rising state pension age.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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