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.

Extra! Extra! Read all about it! Topping up your State Pension: is it worth it?

Financial planning and retirement planning can get complicated when coming to the right solution for each individual. The new flexibility introduced in the Budget 2014 is very welcome, however it is very important not to forget the basics, such as the State Pension available to each individual.

Normally, as part of our standard process, we ask individuals to check their State Pension benefit accumulation to ensure that the correct value is being achieved. This may not always be the case and it is important that allowances, such as the Home Responsibilities Allowance, are accounted for. This can be achieved by using a BR19 State Pension Forecast form, which may be found here: https://www.gov.uk/government/publications/application-for-a-state-pension-statement-form-br19-interactive-pdf or by going online to check the value of future benefits here: https://www.gov.uk/calculate-state-pension

It should be clear that in most cases there is real value in maximising the index-linked income from the State Pension, and reviewing the benefits, in our opinion is usually worthwhile (not in all cases), especially if you have the opportunity to increase their value.

Extra! Extra! Read all about it!

From October 2015, pensioners will be able to ‘buy’ up to £25 a week of extra State Pension. This option will be open to anyone who reaches State Pension Age before April 2016 – in other words, women born before 6 April 1953 and men born before 6 April 1951. The scheme aims to compensate the millions of pensioners who will miss out on the new flat-rate State Pension, which will come into effect from April 2016 and will pay around £155 a week.

If you qualify, there is only a short window of opportunity to increase your State Pension under this new top-up scheme: the scheme will run for 18 months, from 12 October 2015 to 1 April 2017.

Is this a new top-up scheme?

Yes, although there’s already a system whereby you can top up your basic State Pension. You currently need 30 years of full National Insurance contributions to qualify for the full basic State Pension. If you’ve accrued fewer years, you can make a lump-sum payment to increase the amount of basic State Pension you will receive on retirement.

The new scheme doesn’t replace this system and it’s important that you check that you have full entitlement to the full basic State Pension before you subscribe to the new top-up scheme. This is because your money will buy you significantly greater benefits under the existing scheme – for example, a sum of £890 would currently buy a 65 year old £4.64 a week of extra basic State Pension, whereas under the new scheme the same sum would boost your income by just £1.

What benefits can I ‘buy’ extra?

You can choose to top up your State Pension by between £1 and a maximum of £25 per week. How much you’ll need to contribute depends on how much extra pension you want to get each week and how old you are when you make the contribution.

For example, you are 68 years old in October 2015. You decide that you want an extra £5 per week (£260 a year) on top of your pension. The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5. Therefore, you’ll make a lump sum payment of £4,135.

An online calculator is available at https://www.gov.uk/state-pension-topup . This will give you an idea of the cost and value of buying extra State Pension income at your current age.

Chapters Financial Limited is not responsible for the content of external webpages.

Does the new scheme offer value for money?

It could, for many people. The scheme works like an annuity, in that you are buying a guaranteed (and index-linked) income for life with a lump sum payment. Thus, your investment will only pay off if you live long enough to recoup the cost of buying the income and subsequently start earning a ‘return’. So those in good health should benefit from topping up their State Pension.

The maximum additional benefit of £25 a week costs £22,250 for a 65 year old. This is equivalent to an annuity rate of 5.84% - significantly higher than the current market rate of just over 3%. The return is higher still for older pensioners – a 70 year old will pay £19,475 for an additional income of £25, which is equivalent to an annuity rate of 6.67%.

Spouses and civil partners will also be able to inherit 50% of the top-up on the death of the pensioner, and the resulting income payments will remain index-linked.

The scheme may offer poorer value for money for a range of individuals:

• Single pensioners – as they have no spouse/civil partner to inherit 50% of their top-up
• Those with shorter life expectancies – as they may not live long enough to benefit from their investment
• Those who need access to their capital in retirement – rather than committing their lump sum to buying an income

What are the alternatives?

There are alternatives and each individual case is different. This is where high quality financial planning advice can help you understand the options and to allow appropriate decisions to be made as to the ways clients and enquirers use their capital to gain income.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pensions 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 team in either Guildford or Woking.

Vicky Fulcher

Trainee Financial planner

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