Proposed State Pension reforms could see you miss out on thousands every year, just for having the wrong birthday...
If there’s anything that modern politics has taught us, it’s that you can tax virtually anything.
But the latest levy the government is proposing to hit 12 million of us with will astound even the most tax-hardened statist.
It’s a tax on your birthday.
Ok, so maybe I’m being a little facetious; the government isn't really introducing a tax on birthdays. But nevertheless, if its proposed State Pension reforms become a reality, it will penalise a whole section of society solely on the basis of when they were born.
The £140 change
It’s all to do with the proposed government move to a straight £140 a week state pension. While this increase is good news for most people under the age of 60, it’s not so good for anyone who has already reached the State Pension age or will reach it in the next five years. This is because the government is only proposing to bring in the reforms for anyone who reaches State Pension age after 6 April 2016.
This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.
So if you’re a woman born before 6 April 1953 or a man born before 6 April 1951 you’d fail to qualify for the increase and hence be left with your existing State Pension – currently just £102.15. This would leave you £1,968.20 worse off every year; and if you’re planning on living for 20 years after claiming your State Pension, you’d end up almost £40,000 out of pocket.
This discrepancy seems to be a mismatch similar to the ‘strange kink’ that has formed due to the University Maintenance Grants reforms. Indeed, ‘strange kinks’ seem to be a common theme throughout the policies of the Coalition Government, owing to its intentions to introduce several new reforms without papering over the cracks in old policy.
Two-tier system
Critics are suggesting that the change will create a huge divide among the elderly as pensions are essentially run on a two-tier model that could exist for 30 years or more. To make matters worse, those left out of pocket by the change will also have to put up with the older, more complex model of pension payments based on National Insurance (NI) contributions and not a flat rate.
The government has also said that if these proposals go through, those who have contributed to a State Second Pension (S2P) and expect to receive more than the £140 flat rate, can keep these higher payments. However, it may seem a little frustrating for anyone who has worked their socks off for a £145 boosted pension packet to see those with bare minimum level of NI contributions receiving a similar rate.
Of course, there are those that would benefit from the change: most obviously, anyone who reaches the State Pension age after 2016. Those with low levels of NI contributions are also likely to be better off as, while 30 years of contributions will still be needed to receive the full £140, if you only have 20 years you’ll still get £92 a week – far more than you could have hoped to get under the old model. The self-employed would also benefit from the proposed changes; currently they are not eligible for the S2P – but if the changes are put through, they too will get the full £140.
Ed Bowsher thinks now is a perfect time to start a pension. Find out why.
It’s important to emphasise that these proposals are still in the feedback stage and are by no means definite. But if it is looking likely that you could lose under the planned reforms, there are a few things you can do to boost your State Pension packet.
Top it up!
It’s always a good idea to check up on the level of State Pension you’re forecasted to get, as well as when you can your hands on it, as the State Pension age is changing all the time. You can get a State Pension forecast and a calculation of your State Pension age using the Direct.gov.uk website.
If you find that you are lacking in NI contributions and are hence not eligible for the full State Pension then it may make sense to buy back years of contributions and give your eventual State Pension packet a boost. Granted this will require you to pay out an initial lump sum, but you also stand to recoup far more in boosted State Pension payments. You can find out more here.
Keep working
Just because you reach the State Pension age doesn’t necessarily mean you have to claim your State Pension. And if you put off claiming for at least five weeks you can increase your State Pension by 1% for every five weeks worked.
Alternatively – if you put off claiming for over 12 months – you can take the amount of State Pension you would have received if you’d claimed straight away as a taxable lump sum payment. This is in addition to your standard State Pension.
Get saving
If you don’t fancy shelling out to top up your NI contributions or you just fancy giving your retirement income a boost, stashing your money away in a savings account or ISA could be a good idea.
If you've left your pension planning to the eleventh hour, find out how to catch up quick.
You can find out about all the best savings accounts by reading 3pm on a Tuesday is the time to save and find out about ISAs by heading to The best cash ISAs for the new tax year. Or just visit our savings centre and ISA centre to compare all of the market leading deals.
Use all available benefits
Pension specialists Just Retirement estimates that thousands of pensioners are missing out on hundreds of pounds every year, just because they don’t claim for pension credits and other benefits.
Pension credits can top up the existing State Pension by as much as £20 a week, yet out of those pensioners entitled to it, Just Retirement estimates that one in five have never claimed. You can find out if you’re eligible by getting a pension credit estimate. It may also be worth visiting the website turn2us; a charitable organisation that helps people figure out exactly what benefits they are eligible for.
Is this fair?
Should the government roll these reforms out to existing pensioners as well? Are the proposed pension plans fair?
Have you say in the comment box below.
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