What is it and when will it come in to force?
The New State Pension (NSP) is due to come into effect on 6 April 2016 and will replace the current, rather complicated system, for anyone reaching State Pension age on or after that date. Therefore men born on or after 6 April 1951 and women born on or after 6 April 1953 will come under the NSP system.
Anyone reaching State Pension age before the 6 April 2016 will remain under the current system, even if receipt of the pension is deferred beyond that date.
The current State Pension system includes earnings related Additional State Pension as well as the National Insurance record based Basic State Pension. The new system will only take into account the National Insurance record.
Who will be eligible to receive the New State Pension?
Anyone with at least 10 qualifying years on their National Insurance record should be eligible to receive at least some NSP. The full NSP will be payable with 35 or more qualifying years, with a proportional payment on records between 10 and 35 years. The years do not need to be consecutive to count.
Qualifying years are typically where:
- You were working and paid National Insurance Contributions
- You were getting National Insurance Credits, for example, through unemployment or being a parent carer
- You were paying voluntary National Insurance Contributions
How will the NSP be calculated?
Your National Insurance record will be used to calculate the ‘starting amount’ of the NSP on 6 April 2016. The starting amount will be the higher of:
- The amount you would receive under the current State Pension (including Basic State Pension and Additional State Pension) and
- The amount of State Pension you would receive had the NSP been in effect from the start of your working life.
If your starting amount is more than the NSP you will receive the full NSP plus the amount above that figure, the excess is known as the ‘protected payment’. You will not be able to build up any more State Pension entitlement.
If your starting amount is equal to the NSP you will receive full pension but will not be able to build any further entitlement.
Should your starting amount fall short of the full NSP, prior to reaching State Pension age you will be able to build up further entitlement up to the full amount.
Can I defer the NSP?
Under the NSP you will still have the option to defer receipt of payment, although the benefits are not as attractive as under the current arrangement. With the NSP you will need to defer for at least 9 weeks and your pension will be increased by 1% for each 9 week period of deferral. This equates to just under 5.8% for each year of deferral.
Once the pension is in payment the basic and additional amount following deferral will be paid every 4 weeks and should increase each year under the current “triple lock” guarantee.
Will I be better or worse off under the new scheme?
It is understood that some people will be worse off under the New State Pension and a committee of MPs have commenced an investigation. Those worse off are expected to be those that retire soon after April 2016 and that were members of contracted out occupational pension schemes in the past, this includes both public and private sector. Under the current regime the contracted out element is inflation proofed either through the pension scheme or by the government. The government element of inflation proofing has historically been made through increases to the State Pension but for those reaching State Pension age on or after 6 April 2016 those increases will not apply.
Further details are expected to follow once the Work & Pensions Select Committee investigation is completed.
Should you wish to discuss your retirement planning and how we may be able to help you understand your options and personal position, please do not hesitate to contact us.