Don't rely on the new state pension to fund your retirement

Published by Jeff Prestridge on 31 March 2016.
Last updated on 31 March 2016


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

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.

More About