Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Brace yourself for state pension turbulence
When do you think you’ll receive your state pension and how much will you get? In an ideal world retirement investors would like to know the answers to these two questions.
The UK state pension system is fiendishly complicated and riddled with uncertainty. As a result, you might feel like you’re fumbling in the dark trying to figure out the foundation on which your private retirement savings are built.
I can at least help shed some light on how much you will get. Under reforms introduced in April 2016, future retirees are entitled to a flat-rate state pension worth around £155 a week.
There is always a catch
Not everyone will get the full amount. In order to qualify for the full state pension entitlement, you need to have 35 qualifying years of National Insurance (NI) contributions. To get any state pension, you’ll need at least 10 years of NI contributions.
You can receive NI credits if you claim child benefit for a child under 12, get Jobseeker’s Allowance or receive a Carer’s Allowance. These will count towards your state pension qualifying years.
The value of your state pension might be lower if you previously contracted-out of the additional state pension (sometimes referred to as ‘S2P’). More details on how the new state pension works can be found on this Government website.
When will I get the cash?
Exactly when you will receive your state pension is likely to be the subject of significant debate in 2017. John Cridland, the former director of the CBI, is leading a review of the state pension age which could be a precursor to fundamental, radical reform.
At the moment, most people get their state pension at age 65. This is scheduled to rise to 66 from 2018, 67 from 2026 and 68 from 2044.
The debate around the state pension age centres on the balance between fairness and simplicity. Giving everyone the same amount at the same age is easy to understand and administer, but those on higher incomes tend to live longer and so will benefit more. Is this right? Or should the rich get their state pension later?
Equally, there are significant regional differences in life expectancy. According to the ONS, a 65 year old man in Kensington can expect to reach their 86th birthday, while a 65 year old in Manchester can only expect to clock up 80 years.
Incorporating things like income and region into the state pension age calculation might be possible, but would add untold complexity to an already complicated system.
As you plan for your retirement, you should prepare for the worst. Whether the Government pursues radical reform or maintains the existing structure, in reality you will probably have to wait longer to receive your state pension.
senior analyst, AJ Bell