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Will your state pension shrink from this April? Millions of workers will see changes to their pension
From April 6, millions of workers will see changes to their state pension. It will leave higher earners worse off and could mean that men risk leaving their wives in poverty when they die. Lauren Thompson explains...
What’s happening?
Although there are plans to eventually increase the basic state pension, it is not yet changing. To get a full basic state pension, currently £102.15 a week, you need 30 years’ National Insurance contributions.
However, workers also get top-ups to boost what the state pays. This second part of the state pension is changing. The amount of top-up you get depends on your salary and the number of years you work. For the average worker it is worth £27 a week, but can be as much as £150 a week.
What is changing?
There are three major rule changes. The first is the value of the second state pension. High earners will receive less, but most people will receive more. Another change will bar workers from taking their state pension top-ups and putting them in their own pension fund, known as contracting out.
And a third new rule will give retirees more choice about how they use their second state pension. But it is this which could leave wives being left with no pension when their husband dies.
Am I affected?
Yes, if you have chosen not to receive top-ups to the state pension (known as contracting out) and you have an ordinary money purchase pension. If you have a final-salary pension and are contracted out, you are not affected by the new rules.
How does contracting out work?
Workers can choose whether they want a second state pension, or have some of their National Insurance contributions redirected in to a personal or work pension instead. This rebate can be worth up to £2,200 a year, but the exact amount depends on how far off you are from retirement and how much you earn.
An estimated £100 billion of this money — dubbed protected rights — is sitting in people’s pension pots.
The advantage of contracting out is that savers can take their pension and a 25 per cent tax-free lump sum from the age of 55, instead of waiting until state pension age.
But the total money they will get from their pension will depend on stock market and annuity rates.
Why the changes?
The state pension, and in particular all its added top-ups and benefits, is very complicated. So, from April 6, no one will be allowed to opt out of the second state pension. Everyone not in a final-salary scheme will be contracted in and get top-ups.
What will happen to any top-ups I’ve taken?
Any existing protected rights pension will be unaffected. You just won’t get any extra top-ups.
How much will I get?
From April 6, for every year you pay National Insurance, you will get an extra £1.70 a week on top of your state pension. Plus, anyone earning above £14,700 can get up to £150 a week.
The Government estimates 23 million people will benefit from the reforms.
What if I want to contract out now?
You can still get a rebate for this year — which could be as much as £2,200. The deadline for contracting out for the tax year 2011-12 is April 5.
You need HM Revenue & Customs form CA1542 which your pension company will send you. The money will be paid as a lump sum into your chosen pension towards the beginning of the new tax year — typically May or June.
What happens when I retire?
Currently, to take an income from a protected rights pension, you are normally offered a joint annuity, which pays an income to your spouse upon your death. But from April 6 this will change. Married savers will be offered a single-life annuity. These provide an income only until the person with the pension dies. Most men take a single-life annuity because this is what pension companies offer. Even those who do shop around still take a single-life annuity because they appear better value.
But they don’t realise they risk leaving their spouse in poverty because, after they have died, the pension will stop paying out. Ros Altmann, director-general at Saga, says: ‘Buying an annuity is a huge decision. Yet many people simply accept the offer from their pension provider, without getting advice first or shopping around for a better deal.
‘If you buy a single annuity, you risk leaving your partner with nothing and the insurance company will pocket your savings.’
Source: Will your state pension shrink from this April? Millions of workers will see changes to their pension
What’s happening?
Although there are plans to eventually increase the basic state pension, it is not yet changing. To get a full basic state pension, currently £102.15 a week, you need 30 years’ National Insurance contributions.
However, workers also get top-ups to boost what the state pays. This second part of the state pension is changing. The amount of top-up you get depends on your salary and the number of years you work. For the average worker it is worth £27 a week, but can be as much as £150 a week.
What is changing?
There are three major rule changes. The first is the value of the second state pension. High earners will receive less, but most people will receive more. Another change will bar workers from taking their state pension top-ups and putting them in their own pension fund, known as contracting out.
And a third new rule will give retirees more choice about how they use their second state pension. But it is this which could leave wives being left with no pension when their husband dies.
Am I affected?
Yes, if you have chosen not to receive top-ups to the state pension (known as contracting out) and you have an ordinary money purchase pension. If you have a final-salary pension and are contracted out, you are not affected by the new rules.
How does contracting out work?
Workers can choose whether they want a second state pension, or have some of their National Insurance contributions redirected in to a personal or work pension instead. This rebate can be worth up to £2,200 a year, but the exact amount depends on how far off you are from retirement and how much you earn.
An estimated £100 billion of this money — dubbed protected rights — is sitting in people’s pension pots.
The advantage of contracting out is that savers can take their pension and a 25 per cent tax-free lump sum from the age of 55, instead of waiting until state pension age.
But the total money they will get from their pension will depend on stock market and annuity rates.
Why the changes?
The state pension, and in particular all its added top-ups and benefits, is very complicated. So, from April 6, no one will be allowed to opt out of the second state pension. Everyone not in a final-salary scheme will be contracted in and get top-ups.
What will happen to any top-ups I’ve taken?
Any existing protected rights pension will be unaffected. You just won’t get any extra top-ups.
How much will I get?
From April 6, for every year you pay National Insurance, you will get an extra £1.70 a week on top of your state pension. Plus, anyone earning above £14,700 can get up to £150 a week.
The Government estimates 23 million people will benefit from the reforms.
What if I want to contract out now?
You can still get a rebate for this year — which could be as much as £2,200. The deadline for contracting out for the tax year 2011-12 is April 5.
You need HM Revenue & Customs form CA1542 which your pension company will send you. The money will be paid as a lump sum into your chosen pension towards the beginning of the new tax year — typically May or June.
What happens when I retire?
Currently, to take an income from a protected rights pension, you are normally offered a joint annuity, which pays an income to your spouse upon your death. But from April 6 this will change. Married savers will be offered a single-life annuity. These provide an income only until the person with the pension dies. Most men take a single-life annuity because this is what pension companies offer. Even those who do shop around still take a single-life annuity because they appear better value.
But they don’t realise they risk leaving their spouse in poverty because, after they have died, the pension will stop paying out. Ros Altmann, director-general at Saga, says: ‘Buying an annuity is a huge decision. Yet many people simply accept the offer from their pension provider, without getting advice first or shopping around for a better deal.
‘If you buy a single annuity, you risk leaving your partner with nothing and the insurance company will pocket your savings.’
Source: Will your state pension shrink from this April? Millions of workers will see changes to their pension
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