MANY Scots about to retire are in for a shock when they discover they don’t quality for full payment under new rules, writes Jeff Salway
THE government is under growing pressure to clarify details of the single-tier pension being introduced next year, amid confusion and fears that many people will miss out.
Scots approaching retirement are being urged to get a state pension forecast as soon as possible, with many facing a shock as they discover they aren’t entitled to the full pension under the new system.
The overhaul, taking effect next April, is designed to simplify the state pension system and give women, the self-employed and low income workers a better chance of claiming the full payment.
Yet the government has been forced to admit that many people will either be worse off under the new system or receive less than expected. Just 45 per cent of people retiring between 2016 and 2020 will get the full payment government figures suggest.
The new system, first set out in 2013, will affect people retiring on or after 6 April, 2016 and not those already being paid their state pension. But even as the clock ticks down to the launch date, the government has yet to confirm exactly how much the full flat-rate will be worth (although we do know that it will be at least £151.25 a week).
It has also come under fire for failing to make sufficiently clear how the change affects people who have contracted out of the state pension.
Under the changes, everyone with at least 35 years’ worth of full qualifying national insurance contributions (NICs) will get the full flat-rate, while a minimum of ten years of NICs or credits will be required to claim at least some of the new state pension.
The additional state pension – such as the state second pension (S2P) or the state earnings related pension scheme (Serps) – is to be phased out from next April. It will still be paid to people who reached state pension age before 6 April, 2016, but it won’t be possible to make further contributions after that date.
Most of those missing out on the full payment will have been contracted out or have incomplete NICs records, such as the self-employed and women who have taken career breaks to raise children.
But experts say the changes haven’t been properly communicated to people approaching their state pension age and who will be most affected.
“The government hasn’t been very good at explaining the position to those caught in the transition, who worry that they’ll be getting less than they expected and want to know how to work it out,” said Carl Melvin, director of Affluent Financial Planning in Paisley.
He warned that many people are unaware that they’re likely to get less than the full amount, particularly those with contracted out status.
“The state pension is complex and the government hasn’t found a way to inform consumers in an easy to understand way. When the answer to your question is ‘it depends on your circumstances’, it will inevitably lead to confusion and/or apathy.”
The reasons why people might not get the full pension must be made far clearer, according to Graeme Mitchell, managing director at Lowland Financial in Galashiels.
“The most significant one for me is where an employee was contracted out of Serps, potentially via a final salary scheme or personal pension,” he said. “In that case, not unreasonably, the benefits will be scaled back as they will have money elsewhere to offset. But they might not be aware of this.”
The confusion was exacerbated by the Queen’s speech, which included a pledge to maintain the “triple lock” on the basic state pension until 2020 but didn’t clarify that it would apply to the single-tier system.
“Tomorrow’s pensioners need clarity now on whether the triple lock applies to the new single-tier pension from April 2016,” said Kate Smith, regulatory strategy manager at Aegon. “People need certainty now, so they can plan ahead and live in dignity and security in retirement.”
The biggest step you can take if you’re likely to be affected by the shake-up is to get a state pension forecast, either online at www.gov.uk/calculate-state-pension or by calling the Pension Service (0800 731 7898).
The state pension service gives those eligible for the single-tier pension an estimate of how much they’ll be entitled to, based on their NICs record.
If you’re more than 30 days off state pension age you can also get a statement by completing the BR19 application form (which can be found at www.gov.uk/government/publications).
The good news for some of those approaching retirement is that there will soon be an opportunity to boost their entitlement to the full single-tier payment.
A top-up opportunity launching in October will allow people eligible for the state pension to improve their rights by purchasing Class 3A NICs.
An additional £1 a week of state pension benefits will cost £890 for those aged 65, rising to £22,250 worth of Class 3A NICs that would buy the £25 a week maximum. The credits are added to the weekly pension payment for life and will rise with inflation. The cost per extra £1 will reduce with age, falling to £779 for 70-year-olds, then £674 from age of 75 and so on.
You can call 0845 600 4270 to work out how much you would need to buy to increase your entitlement by particular amounts, or visit www.gov.uk/state-pension-topup.