The State Pension......and the possible changes ahead?

This week we have seen our coalition Government turn their attention to the State Pension and the way the current benefits are provided. I am sure there will much press coverage, comment and concern about future changes, both for those who may be effected in the shorter term, from 2017, and for those who hope to claim this benefit into the longer term.

I wanted to provide a summary, and for the purposes of this Blog, I have divided this into the following sections:

The Past and Present

Currently, the basic State Pension amounts to £107.45 per week. This income is paid gross, but is taxable and increases with the Consumer Prices Index (CPI) with a minimum guarantee of 2.5% if CPI falls below this rate, which it did in 2012. On top of this, you might also receive additional State Pension income from past accrual of the State Earnings Related Pension (sometimes known as SERPS) or its successor, the Second State Pension (S2P). I have seen this additional pension benefit when added see the overall pension paid double on regular occasions.

My current understanding is that those who have State Pension benefit in payment before 2017 will not be affected by the possible proposals.

You can probably tell that this can be a complicated calculation when taking into account all the varying factors, with a maximum accrual achieved over 30 years (proposed to increase to 35 years). Here lies part of the perceived problem and the target to simplify the process. It is also proposed that no State Pension will be achieved, with a proposed minimum of 10 years National Insurance accrual to qualify for any State Pension.

How do I check my current State Pension benefit?

You can check your current accrual of your State Pension by completing a BR19 State Pension Forecast Form (available here).

State Pension Deferral

It is currently possible to defer the State Pension after your normal State Pension age (which we know as been increasing over recent times and still increasing), seeing the benefit deferred increasing by 1.0% for every 5 week period. This increase amounts to 10.4% over a full year and this option can be beneficial in financial planning for those who, as an example, continue to work and have no immediate need for the income.

For information, this increase can be taken as taxable cash or increased taxable income. It will be interesting to see if this option survives the final ruling on future changes.

The Future?

The new proposals put forward for 2017 suggests a flat rate of State Pension of around £155.00 per week in total (about £144.00 per week in today’s terms). Of course, this figure may change when everything is finalised. Past SERPS and S2P accrual (which might have given a higher income if the rules had not changed) will be gone.

Of course and as usual, there are winners and losers by changes in legislation. Winners are likely to lower earners and some have indicated females who opted out of the State Pension many years ago. Losers are likely to be higher earners or medium earners who did not contract-out of SERP's (option started in 1988 and stopped around 2 years ago).

Summary

It is suggested that the other 'winner' in these proposals will be the Government, with an overall reduction in long term costs. We are all living longer and, understandably, this places greater burden on the pension system, whether that be the State system or private sector schemes. Clearly, planning for your future retirement will become ever more important to secure future benefits.

No individual advice has been provided during the course of this blog. Pension and retirement planning should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800

Keith G Churchouse FPFS
Director, ISO22222 Certified Financial Planner
Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.