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New state pension aims for simplicity and clarity

Published 03/04/2016

The new system aims to sweep away complexities and give people a clearer idea from a younger age of how much retirement income they are likely to get
The new system aims to sweep away complexities and give people a clearer idea from a younger age of how much retirement income they are likely to get

The new state pension launches this week, to give savers a more solid base for their retirement planning.

It aims to sweep away complexities in the existing system and give people a clearer idea from a younger age of how much retirement income they are likely to get, giving them a firmer foundation to build on with other pension savings.

The state pension will change for people who reach pension age on or after Wednesday April 6. To get the new state pension, men must have been born on or after April 6 1951 and women must have been born on or after April 6 1953.

The current state pension system is made up of two parts - the basic state pension as well as the additional state p ension which is extra money on top of the basic state pension.

But the full new state pension will be at a single-tier rate, of £155.65 a week. Usually people will need at least 10 years of qualifying National Insurance (NI) contributions to get any state pension.

The new state pension is part of a retirement savings revolution which has been taking place in recent years, amid efforts to head off fears of a looming old-age savings crisis as people are living for longer but not putting enough cash aside.

From 2012 onwards, people have gradually been placed into workplace pensions, which will help them boost their retirement funds on top of any cash they will get from the state pension.

And Wednesday also marks one year since the retirement freedoms were launched to give people aged 55 and over more control over their pension pots. The package of reforms should ultimately give people more confidence that saving into a pension is worthwhile.

But while the new state pension is generally expected to be simpler to understand in the long run, concerns have been raised that, at present, people are confused about how it will affect them.

Around 70,000 people in their fifties and sixties will miss out entirely on the new state pension between now and 2030, charity Age UK has warned.

Some 50,000 women and 20,000 men do not have the minimum number of qualifying years of NI contributions, according to the charity's analysis. The existing regime allows people to receive at least some state pension even with only a few years of NI contributions.

The Work and Pensions Committee also recently found that "neither the winners nor losers yet know who they are".

In the early years of the new system, claimants with fewer than 10 years of qualifying contributions, people who derive rights to a pension based on their spouse's contributions and those who built up large guaranteed minimum pensions between 1978 to 1988 face receiving less than they would under previous rules, the committee warned.

A report from retirement solutions company Aegon UK also uncovered a "shocking" lack of awareness about the new state pension among working-age people.

Aegon found two-thirds (67%) of the nearly 4,000 working-age people surveyed were unable to correctly identify that the full rate for the new state pension will be £155.65 a week.

One-third (34%) of people surveyed wrongly thought the payments would be higher, and upon learning the actual figure, nearly two-fifths (37%) now plan to put more into their private pension to pay for their retirement.

Some 38% of people in the survey carried out between February and March had no idea whether they will qualify for the full state pension or not.

In the recent Budget, the Government promised that a "pensions dashboard" will be set up by 2019, where people will be able to see all their pension pots in one place. The dashboard should help pension savers work out how much more cash they need to put away for their retirement, as well as how much they already have.

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