Despite the arrival of a new state pension, we still have the old one running alongside it, and the added complexity this brings.
For many people, the state pension is the bedrock on which private pension provision is built. How to qualify, how much it will be and at what age you can expect to get it are all factors that must be considered.
Uncertainty also exists around the timing of future state pension age increases and what impact this will have on your private pension planning.
There are many myths and misconceptions about the state pension rules which need to be corrected. Here are 10 of the biggest.
1. You must retire before you can get the state pension.
Not true. There was originally an earnings rule in place, but this was dropped in the 1980s.
Now there are only two conditions: that you have reached the designated state pension age and have the necessary number of qualifying years of National Insurance under your belt.
2. You can get an “early retirement” reduced-rate state pension between age 55 and your normal SPA
Not possible, I am afraid. So-called actuarially reduced early retirement pensions are only available with some private and public service pensions, not the state pension.
3. You do not have to pay tax on your state pension
You may have to pay tax on some or all of it. Your state pension is treated as taxable income and added to any other taxable income (e.g. private pensions, earnings and so on) that you may have. Any excess after deduction of your personal tax allowance (currently £12,500 a year) is then subject to income tax in the normal way. If you are living outside the UK, you may still have to pay UK tax on your state pension.
4. The new state pension, which came in from 6 April 2016, is a flat-rate one
It is certainly the intention over the longer term to have a single flat-rate state pension which most people who fully satisfy the NI conditions will receive. However, because of the rather complicated transitional arrangements necessary in moving from the old system to the new in 2016, there are currently some people who will receive more than the flat rate (because of substantial SERPS/S2P holdings) and others who will receive less (either because of missing NI contributions or due to “contracting-out deductions”). Your AAM Financial Planner can help you understand what this means for you.
5. You need 35 years of NI contributions to receive the full rate of the new state pension
Broadly correct, although there will be some people for whom the bulk of their NICs were made under the old system in the years preceding 6 April 2016. They may find they have more than 35 years in total but still fall short of qualifying for the full pension.
6. You can always plug gaps in your NI record by opting to pay voluntary contributions
Not always. It depends where the gaps are. Normally, you can go back six tax years for the purpose. But, as indicated above, be wary of paying voluntary National Insurance for periods prior to 6 April 2016 where you may already have enough (30 years) to satisfy the conditions under the old system. Your extra contributions will count for nothing in that event.
7. Reduced-rate NICs payable under the old “married woman’s option” count in aggregate towards the state pension
Completely wrong. These types of contributions, which were phased out for newly married women in 1977 but retained in some cases for existing contributors, do not count at all for the state pension.
8. NI credits are allowed automatically if you are at home looking after children
Not quite. NI credits are awarded automatically if you are a parent registered for UK child benefit for a child under 12 – even if you do not receive it – but not otherwise.
9. Once you get it, your state pension goes up by the higher of 2.5%, CPI inflation or National Average Earnings
It depends – in many countries your UK state pension will be frozen once you start receiving it. In South East Asia while Thailand is the most popular retirement destination for retiring Britons, only those living in the Philippines get annual increases. Currently those retiring in the EU / EEA receive increases, but it is unclear what will happen after Brexit. Your AAM Wealth Manager can help you understand what the position is for the country where you plan to retire.
10. Deferring your state pension is only an option at SPA before you start to draw your pension
Not true. You can opt to stop and restart payments of your existing state pension at any time, although you can only do it once. This appears to be a little-known option for boosting the level of a state pension.
What should you do now?
Retirement means moving from money coming in to money going out and understanding what your retirement cashflow looks like is essential.
Get your State Pension Forecast and speak to your AAM Wealth Manager or email [email protected] to ensure that you can enjoy your retirement with peace of mind.
Don’t miss the chance to ensure that you will have the retirement you want rather than settling for the life you can afford.
Op.ed piece by Ian Black, Director of Global Wealth Structuring, AAM Advisory
This article is an op-ed piece by Ian Black. The views expressed in this article are those of the author and do not necessarily reflect the views of AAM Advisory Pte Ltd. This document/article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any securities/products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.