Q. I am due to retire shortly after the introduction of the new single-tier state pension in 2016. Please can you tell me how my state pension entitlement will be calculated under the new system and how will my National Insurance Contributions, paid under the current regime, be taken into account?
A. Yes. The new flat-rate state pension is scheduled to commence in April 2016 (one year ahead of the original start date). Whilst the current system will apply for people who retire before that date, anyone retiring from April 2016 will receive the new-style pension.
The new flat-rate pension is scheduled to provide a retirement income of £144 per week. A person will require a minimum of 10 years of NICs (or credits) in order to receive any benefit and 35 years of NICs (or credits) in order to receive the full pension of £144 per week (an increase from 30 years required at present in order to receive a full basic state pension).
A person with a history of NI contributions as at April 2016 will be entitled to a “foundation pension” equivalent to the greater of their entitlement under the existing regime and the new one. However, a “contracted-out deduction” will be applied in respect of periods of contracted-out employment. Further information regarding how this deduction will be applied can be found in the DWP’s guidance document “The Single-Tier Transition and Contracting-Out”.
If you are in any doubt as to how much your state pension may provide, I recommend that you request a forecast of your benefits. This can be obtained by post or on line. Further information is available at https://www.gov.uk/state-pension-statement Alternatively, you may wish to seek advice from a chartered financial planner, who specialises in retirement planning.
Q. I heard a radio report recently that said the UK’s currency is going to become plastic. Was this a practical joke?
A. No. The Bank of England announced recently its plans to convert the UK’s paper currency to plastic. If the switchover is agreed following a public consultation later this year, British notes will be converted to plastic – denomination by denomination – commencing in 2016 with the £5 note.
Several countries already use plastic currency, including Canada, Fiji and Mauritius. When Australia switched to plastic notes more than 20 years ago it was said that it would appeal to the country’s surfers. However, experience has demonstrated that plastic notes are more durable, have the potential to be more decorative and, crucially, are harder to counterfeit.
Q. I read with interest last week an article that bemoaned the UK’s “pensions gap”. How can I ensure that I do not fall victim to this “pensions gap”?
A. The Department for Work & Pensions recently conducted a survey into the retirement savings habits of UK workers. As a result, the government has estimated that up to 13 million people are heading for a significant drop in their living standards when they retire (2 million more than the government had estimated previously). This accounts for one-third of the UK workforce.
The government’s auto enrolment project, under which the majority of the UK workforce will be enrolled automatically into a workplace pension, is expected to close the earnings gap between work and retirement for a minority of workers. However, the government predicts that 12m workers will still face a significant drop in their income and living standards in retirement. Perhaps surprisingly, the problem is worst amongst middle- and higher-income earners.
The Pensions Minister, Steve Webb, has argued that the biggest obstacle to bridging the retirement savings gap lies in middle-aged workers taking early retirement and/or dropping out of the labour market prior to retirement, perhaps due to general poor health, long-term illness, redundancy or caring responsibilities.
The key to ensuring that you have adequate income in retirement lies in making sufficient savings during your working life. Opinions differ as to how much a person ought to save into a pension and, consequently, there is not set formula. In any event, how much you need to save will depend upon a number of factors, including the age at which you begin saving, the age at which you wish to retire and, crucially, the level of income in retirement to which you aspire.
I recommend therefore that you seek advice from a chartered financial planner, who specialises in retirement planning, who will be able to assess your financial circumstances and recommend appropriate strategies to assist you in attaining your aspirations for retirement.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
