Top up & take? / More State Pension changes

Top up & take? / More State Pension changes

We all know that as a demographic, we are living longer. To maintain our standards of living, many of us are also working longer, past the current State Pension age of 65 and beyond.

Whilst taxable earnings are available, some chose to defer their State Pension Benefits until they are needed. This in the past has been advantageous for most with an uplift in deferment of 10.4% pa for each full year deferred. The current standard full State Pension (in the tax year 2014/2015 is £113.10 per week (£5,881.20 pa gross) and you may also be entitled to additional State Pension benefits, such as State Earnings Related Pension (SERPS), Second State Pension (S2P) or a Graduated Pension).  

You may want check your State Pension to ensure you are up to date you can use the State Pension Forecast service here:  https://www.gov.uk/state-pension-statement

The Government has recently announced that this deferral uplift in their State Pension will be cut by almost half. These changes are being brought in because we are all living longer, as noted, and the comparatively generous rate of increase to date will not be sustainable into the future.

The Pensions Minister, Steve Webb, stated that when the new, single-tier State Pension system is introduced in April 2016, people who choose to defer their State Pension beyond state pension age will only receive a 5.8% increase in their pension if they delay payments for a year. Just over half the current increase of 10.4%.

Under the current rules, someone choosing to defer for one year would need to live for around another ten years to make the decision financially worthwhile. When the reduced rate of increase is introduced, you would have to live for about 19 years to benefit from their choice. If we knew how long we would live, this would make the financial planning a lot easier, although I am sure it would have many other undesired effects!

In monetary terms under the new regime for State Pensions to be introduced in just over 18 months’ time, an individual receiving the full flat-rate State Pension of approximately £155 a week (£8,060 a year) would see an increase in their total annual benefits of only £467.48 if they defer for a year. If you look at this over the course of retirement, say 25 years, someone deferring at the old 10.4% pa rate of increase would receive over £17,000 more from a State Pension of £155 a week than an individual under the new rules.

The good news is that anyone who reaches State Pension Age before 6 April 2016 can still get the 10.4% rate of increase if they choose to defer taking benefits. It’s disappointing news, though, for anyone who will retire after that date and had planned to delay their State Pension.

Deferral may still be a sensible move for someone in very good health who intends to carry on working, or who has substantial pension income from other sources. However, for the majority of retirees after April 2016, it may well be a case of ‘top-up and take’ – checking that you have accrued the number of years required to qualify for the full basic State Pension and, if you haven’t, make a lump-sum payment to rectify the situation – and then start taking benefits.

The ability to top-up the State Pension (voluntary Class 3A National Insurance Contributions) will currently become available (from October 2015) to those close to and over state pension age and full details can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300007/wms-state-pension-top-up.pdf

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It would be worthwhile checking that any voluntary contribution offers the potential for value before proceeding to join in the new initiative.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pension’s legislation on your finances. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS   

Director, Chapters Financial Limited 

Chartered Financial Planner
Certified Financial Planner 

ISO22222 Personal Financial Planner 

  Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.