Despite the introduction of a new state pension in April this year, there is still widespread confusion about National Insurance Contributions (NICs) and their impact on the amount of pension people are eligible to claim, according to new research from Aegon.
The insurer’s latest Readiness Report reveals that a worrying 80% of people do not know how many years they need to pay National Insurance for in order to receive the full state pension, while one in three were also unaware that taking lengthy career breaks may mean their state pension is reduced.
Under the new state pension, which applies to all people retiring after 6 April 2016, individuals need 35 years of National Insurance Contributions to be eligible to claim the headline rate of £155.65 a week - five years more than was required under the previous scheme. Those with between 10 and 35 years’ contributions receive a proportional payment, while people with less than 10 years will not be entitled to any state pension.
Aegon says this lack of understanding is particularly important given the number of people that do decide to take time out of work. Its research shows that 55% of people have taken a career break of a year or more at some stage during their working life, with this figure rising to 61% among women.
Not all career breaks will impact your state pension
However, not all ‘career breaks’ will impact your state pension. Protection is provided for those that take time out of work for children, with National Insurance Credits being paid to claimants of Child Benefit. Likewise, claimants of the Carers Allowance, Job Seekers Allowance and the Employment and Support Allowance will also receive free credits if they are not in work.
The government is in the process of writing to some 100,000 people to advise them that they will not be entitled to any state pension, however given its findings, Aegon says, greater steps need to be taken to educate the general public.
Kate Smith, head of pensions, at Aegon UK says: “The fact that 80% of people don’t understand the potential implications of career breaks on their state pension just highlights the sheer scale of the task ahead to properly educate people about the new state pension. We already know that millions of people simply don’t know how much they are set to receive, and these new statistics should ring alarm bells.
“While it is encouraging that the Government is taking steps to rectify this unawareness, it really has just taken the first step on a long journey. To ensure no one loses out, every individual in the UK should be contacted and provided with an estimate of the state pension they are on target to receive – this will start to clear the widespread confusion and prevent people getting a nasty shock when they do reach state retirement age. This approach will not only force people to engage with their pension more often, it may also prompt them to review their private provision and in doing so, take stock on whether they are on course for the retirement they aspire to.”