Don't rely on the new state pension to fund your retirement
Governments love to tinker with our pensions, rarely for better, often for worse. They simply can’t keep their greedy mitts off them. Shame. The new tax year, beginning on 6 April, will see yet more pension change inspired by government meddling.
Little of this fiddling, I reckon, will make us more confident about seeing out our retirement in financial style. Far from it. For a start, the new tax year heralds a vicious attack on the ability of additional-rate taxpayers (I am not one, just in case you are thinking) to fund their pensions.
These 45% taxpayers will be restricted in the amount they – and their employers – can pump into their private pensions.
In some instances, they will see the maximum permitted annual contribution will fall from £40,000 to £10,000.
Simultaneously, there will be a further reduction in the size of pension fund you can build without a tax charge being applied to any excess.This falls from 6 April by £250,000 to £1 million.
If the government carries on like this, it will squeeze the life out of pension savings. What is the point of saving in a pension if you are constantly looking over your shoulder wondering whether you will be taxed to the hilt – 55% – for successfully looking after it and growing it? Little.
Yet these changes are masked by the overhaul of the state pension that also kicks in on 6 April. Out with the old, in with the allegedly all-singing, all-dancing new state pension.
If you believed the government spin doctors – which you shouldn’t as a matter of course – the new state pension is the best thing to happen to us since sliced bread.
According to the Department for Work and Pensions, it will make “millions of us better off” – primarily the self- employed and women who have taken career breaks.
What it neglects to tell us is that millions of us will actually be worse off – those who at some stage ‘contracted out’, in the process paying lower national insurance (NI) contributions. Indeed, one firm of pension experts, Hymans Robertson, has estimated that more than 20 million workers are likely to be worse off due to the new state pension.
So winners, yes, but plenty of losers also. After all, the government can’t save the £8 billion it is expected to save from its introduction without there being a lot of people who will be worse off.
The new state pension is not without merit though. It aims to simplify matters for people reaching state pension age.
It will kick in for any woman born on or after 6 April 1953 and any man born on or after 6 April 1951.
In broad terms, under the new regime, your state pension will be dependent on your NI record. If you have contributed for 35 years, you will get the maximum amount – £155.65 a week from 6 April. Nice and straightforward.
This compares with the regime pre 6 April, where the state pension is based on a confusing mix of basic state pension (£119.30 a week) and additional state pension.
For those yet to reach state pension age, their NI record will be converted into a starting amount under the new state pension and they will build from there.
Yet while the objective of a simpler state pension is a good one, the transition from old to new is creating a pensions minefield. Most people have no idea how their state pension entitlement will be impacted.
There are a few things you can do to get to grips with this unholy mess. For a start, I urge you to get a state pension statement.You can do this by completing a BR19 form, available from website Gov.uk.
Although some MPs believe these statements need to be improved to take account of the state pensions world post 6 April, they will give you an idea of how your state pension is progressing. They will also tell you when you will reach state pension age – it keeps being pushed back – and when you can take your pension.
Irrespective of how heartening – or depressing – your statement is, I would use it as a trigger to ensure you aren’t reliant upon the state pension in retirement. That means saving as much as you possibly can into your own pension (mindful of the tax traps I have already mentioned) and your own tax-friendly Individual Savings Account (Isa).
It is the only way you will really be ‘better off’ in retirement.
Read Jeff Prestridge's views on why equity release plans are a sensible option for cash-poor property owners and his views on saving cash.
Or you can read all of Jeff’s previous columns here.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.