THE 2016 STATE PENSION SCHEME

Transcription

1 THE 2016 STATE PENSION SCHEME The changes to the state pension in 2016 are the most radical change to state benefits for a generation. In the following pages we shall endeavour to summarise how these changes will affect our clients. PARAGRAPH NUMBER PAGE NUMBER 1. INTRODUCTION SUMMARY QUALIFYING RULES Pre Post Women Born Between 1951 and Buying Missed Year s NI Credits CALCULATING THE FOUNDATION AMOUNT Not Contracted Out Individuals Who Have Been Contracted In Individuals Who Have Been Contracted Out GETTING A STATE PENSION STATEMENT BUYING ADDED WEEKLY PENSION ENTITLEMENT TO STATE PENSION BASED ON YOUR SPOUSES (OR EX SPOUSES) CREDITS DEFERRED PENSIONS STATE DEATH BENEFITS The Widow(er) Has Dependant Children The Widow(er) Does Not Have Dependant Children WHAT HAPPENS TO PENSIONS CREDIT? CONTRACTING OUT CEASES ON 6 TH APRIL OTHER ISSUES Escalation CONCLUSIONS... 8

2 1. INTRODUCTION The original state pension concept in 1945 was to create a funded state pension for the last years of life. At the time life expectancy for a 65 year old was 12 years for a man, 14 years for a female. Life expectancy at birth was 62 and 67 years respectively. In 2009 this had risen to 18 and 20 years at age 65, 78 and 82 years from birth (Office for National Statistics (ONS)). Successive governments bottled making state pensions funded (indeed, Barbara Castle s state earnings related pension scheme (SERPS) were supposed to be funded as well) meaning that this generation are left with massive promises and a pay as you go system which is unsustainable. Currently state pensions are 6.9% of gross domestic product (GDP) (2012). This is predicted to rise to 8.5% of GDP by 2060 (Department for Work & Pensions (DWP) projections). There are 12.7 million people receiving state pensions with an annual bill currently totalling 100 billion. 1.2 million pensioners live overseas. In 1995 there were four earners to every pensioner. By 2035 there will be two earners per pensioner. The SERPS and related ideas made state pensions far too complex and the pensions credit guarantee system basically gave everyone a pension of 151 a week regardless of what they had paid in via national insurance (NI) taxes. 40% of pensioners are eligible for pensions credit. The following summarises some of the changes in the Taxation of Pensions Act 2014 and the Pensions Schemes Act SUMMARY From 6 th April 2016 a new state pension will become payable. Individuals will receive the best or what they would have received under the pre 2016 scheme and what they are due under the post 2016 scheme. Contracting out will cease for all and there will be no contracting out using pension plans. The number of years NI credits for a full state pension will rise to 35 years from the current 30 years. 3. QUALIFYING RULES 3.1 Pre 2016 The full state benefit of 115 a week is reached after 30 years NI credits. There is no minimum qualifying limit and individuals can use the credits from former spouses to increase their entitlement. Page 2 of 8

3 3.2 Post 2016 The minimum savings period is now 10 years. To get the new 151 level of pension you need 35 years NI credits. Each year s NI contributions earns 1/35 th of the new state pension. Higher pensions are achievable if pre 2016 using your SERPS credits create a pension bigger than the new entitlement. If you work in the EEA then credits to other countries state pensions will give you credits to the UK system. Individuals cannot use the credits from former spouses to boost their NI credits. 3.3 Women Born Between 1951 and 1953 The State Pension Age (SPA) for women does not reach 65 until These women will retain pre 2016 state benefits as their SPA is lower than 65. The government estimate that if these women defer their state pension until age 65 then their benefits will not be far off what the new system provides for. 3.4 Buying Missed Year s NI Credits It is normally possible to catch up missed NI credits (Class 3) for up to 6 years. This limit has been extended to the 2006/7 tax year. It costs 733 to buy one year s NI credit, excellent value if the circumstances are right. 4. CALCULATING THE FOUNDATION AMOUNT Individuals who have not reached their State Pension Age (SPA) by 6/4/2016 will have their benefits calculated using the pre 2016 and the post 2016 rules (the foundation amount). If the pre 2016 benefits (including SERPS) are greater than the post 2016 benefits a protected payment will be credited to their account. This protected payment will then sit above the post 2016 benefits to be paid when the individual takes their state benefits (it rises by Consumer Price Index (CPI) each year). If the calculation shows the individual s current benefits are below the new pension level they can add additional NI credits before their SPA to make up all, or some, of the shortfall. The current system whereby you pay the NI tax regardless of the fact you have more than sufficient credits for the full state pension continues. Page 3 of 8

4 4.1 Not Contracted Out Someone who has never been contracted out will receive: Number of qualifying years to 5/4/2016 x pension in 2016 (say 151) 35 Credits above 35 do not count. 4.2 Individuals Who Have Been Contracted In Number of qualifying years to 5/4/2016 x pension in 2016 (say 151) + SERPS/S2P entitlement 35 This is the easiest way to calculate and explain. If an individual has 32 years NI credits now plus they have say a 56 SERPS entitlement then the calculation is: 32 x 151 = 138. Plus SERPS ( 56) = New benefits are 151 so Protected Payment is or Individuals Who Have Been Contracted Out Number of qualifying years to 5/4/2016 amount. 35 x pension in 2016 (say 151) rebate driven The rebate driven amount is way too complicated to calculate and has to be provided by the DWP, since it will consist of a mixture of credits for SERPS/S2P and debits for contacting out. Individuals can check and query their NI record to make sure the basic information held by the DWP is correct. Guaranteed minimum pension (GMP) is the amount of pension income an occupational pension scheme will have to provide those employees with should they have contracted out of SERPS between 6 th April 1978 and 5 th April The deduction for GMP will be its value as at 2016, bearing in mind that GMP often has fixed escalation at say 7.5% pa. This could lead to discrepancies when retirement is reached, subject to future inflation and scheme changes. If the pre 2016 pension is higher than the post 2016 pension within the foundation calculations then the protected payment is revalued by CPI to the individual s SPA. If the pre 2016 pension is below the new state pension figure the individual can accrue further NI credits prior to SPA to get a bigger pension. This is the one occasion when paying more NI years than 35 actually gets greater benefits. Each year between 2016 and your SPA will create 1/35 th of the SPA (up to the new state pension level). Page 4 of 8

5 5. GETTING A STATE PENSION STATEMENT There is a new website called the Future Pension Centre with further details of how to apply for a statement of your entitlement, see our Getting a State Pension Statement FAQ. 6. BUYING ADDED WEEKLY PENSION There is a window of opportunity for those who are over state pension age to add up to 25 a week to their state pension entitlement. Class 3A NI payments can be made by way of a lump sum to top up to 25 a week. The opportunity to buy extra pension starts on the 12 th October 2015 and ends on the 5 th April The approximate cost is: Age Cost Of Buying Annuity 25 A Week Rate 65 22, % 70 19, % 75 16, % 80 13, % 85 9, % 90 6, % 95 4, % 100 3, % This in the real world is very attractive being perhaps 80% higher than one could obtain commercially. The pension is government backed, escalates by the triple Lock until 2020 (for UK based pensioners) and it has a spouses pension of between 50% and 100% dependent upon your age. As with all state pensions the income is taxable at your highest rates. It will be taken account of for means tested benefits and can be included in a divorce financial settlement. Unfortunately the investment is made from after tax money and the income is taxable so the offer is not very attractive to basic rate tax payers and is unattractive to higher rate tax payers. If you would like a personal illustration then please contact us for our assessment of whether it would be worthwhile you pursuing the offer. If you prefer you can get the basic figures from Page 5 of 8

6 7. ENTITLEMENT TO STATE PENSION BASED ON YOUR SPOUSES (OR EX SPOUSES) CREDITS Under the pre-2016 system spouses and ex spouses can claim state pensions using their deceased / ex partner s credits. For basic state pension the maximum credit is 60% which can be added to the dependant s own credits to boost their payment up to the maximum. In addition, survivor s pensions are available if the spouse is not entitled to the full state pension in their own right. In 2012 nearly 70% of the claims for survivors pensions were paid to men overseas, many of whom had never lived in the UK. With the advent of home responsibility credits and the prevalence for women to work in any event the new pension has done away with this entitlement. There will be transitional rules which take into account NI credits up to 5 th April These will be uprated in a similar way to the foundation sums above. 8. DEFERRED PENSIONS Under the pre 2016 legislation you can defer your state pension and receive a generous 1% increase in the annuity for each 5 weeks you defer (10.4% pa). As an alternative, you can have a lump sum benefit equal to the benefits deferred plus bank rate + 2% (2.5% presently). Under the new rules deferment is far less attractive. The rate of deferment has dropped to 5.8% (ie 1% increase for every 9 weeks deferred), there is no lump sum option and little or no death benefits. See our notes entitled Deferring the State Pension. 9. STATE DEATH BENEFITS Although not strictly speaking state pensions, post 2016 the 3 state bereavement payments are being combined into 1 much simpler alternative. 9.1 The Widow(er) Has Dependant Children A lump sum of 5,000 plus monthly income for 12 months of The Widow(er) Does Not Have Dependant Children A lump sum of 2,500 plus monthly income for 12 months of 150. The new bereavement payment (BP) is expected to be tax free. You do not get it if you have just paid Class 3 NI payments or you have simply accrued credits. BP should not affect other state benefits. There is no transitional element, simply date of death. Page 6 of 8

7 10. WHAT HAPPENS TO PENSIONS CREDIT? As pensions credit is designed to provide a minimum equivalent to the new state pension, the guaranteed element is not going to be required unless the combined income of both spouses is below 230. It is proposed that the savings element of pensions credit will cease for those retiring after Those in receipt of the savings element before 2016 can continue to receive same whilst they still qualify. Other means tested benefit such as housing benefit and council tax benefit will continue under the new regime. 11. CONTRACTING OUT CEASES ON 6 TH APRIL The new state pension does away with the earnings related state pension scheme and all reductions in NI offered to final salary pension schemes. There is provision in the Pensions Act 2014 to enable employers to force trustees to accept 3.4% lower funding post 2016 (or insist on 3.4% member contribution increases) to ensure employers are not out of pocket, however, accrued benefits must be safeguarded. Between 2016 and 2018 HMRC propose to issue contracted out certificates to all members of schemes and there afterwards they will cease to hold records. In effect therefore every contracted our scheme will have its certificate cancelled on 6 th April 2016 and will have a little over 2 years to reconcile all of its historical records with HMRC, otherwise the liability for same will fall entirely on the scheme. Expect complete chaos as the administrators endeavour to get the historical records correct. 12. OTHER ISSUES 12.1 Escalation The current triple lock to ensure benefits rise by the consumer price index (CPI) or the retail price index (RPI) or the all earnings index (AEI) continues to Pre 2016 SERPS benefits were revalued using the National Average Earnings escalation rate (a national index measuring the growth in average earnings), however post 2016 it will be at CPI. Page 7 of 8

8 13. CONCLUSIONS As we said in the introduction, this is the biggest change to state pensions in a generation. Whether you are retired (and therefore could make class 3A contributions) or you are still in work (and therefore need to check your state retirement date and whether you are getting a protected payment), you need to check your state entitlement to ensure you maximise your NI contributions. For those with more than 5 years to their state retirement age we suggest you wait until the autumn of 2016 to get a revised forecast by which time hopefully the systems will be fully and correctly operating. Please note that whilst every effort is made to ensure that the information contained within this explanation is correct, these notes are by necessity brief and of a generalised nature. Clients should seek specific personalised advice prior to undertaking any arrangement. These notes are named The New State Pension Scheme 2016 and was last updated in November Whilst we have done our best to ensure facts are current to this date laws and options are changing constantly so always check before action. E.&.O.E. Page 8 of 8