The State Pension changed on 6 April 2016.
If you reach State Pension age on or after that date you’ll get the new State Pension under the new rules.
The new State Pension is designed to be simpler than the old system, but there are some complicated changeover arrangements which you need to know about if you’ve already made contributions under the old system.
What are the old rules for the State Pension?
Prior to 6 April 2016, the state pension system had long consisted of two components: a basic state pension (£119.30 in 2016/17) and, for employees only, an earnings-related pension.
In addition to this was the means-tested Pension Credit, guaranteeing a minimum overall weekly retirement income of £155.65 (in 2016/17).
Unless you reached your State Pension Age (SPA) before April this year, that complicated structure will no longer apply to you.
Key changes to the State Pension
The earnings-related part of the old system which applied to employed people, called the Additional State Pension is abolished.
The new State Pension is based on your National Insurance (NI) record alone. For the current tax year 2016/2017 the new state pension is £155.65 per week – however you may get more than this if you have built up entitlement to additional state pension under the old system – or less than this if you were ‘contracted out’ of the additional state pension.
To be eligible for the full £155.65 per week you will need 35 years NI record.
What if you have less that 35 years of NI?
To get the full amount of the new state pension you’ll need to have 35 years worth of NI contributions or credits (known as qualifying years) during your working life. Importantly these don’t have to be consecutive years.
If you have less than 35 years of NI contributions or credits, you’ll get an amount based on the number of years you have paid or been credited with NI.
However, if you have less than 10 years, you won’t normally qualify for any State Pension.The single-tier reform has come with many transitional provisions, the most important of which sets a “starting amount” of pension as at 6 April 2016, which is the greater of:
- what you accrued under the old rules; and
- the amount you would get if the new rules had existed when your working life began.
This calculation includes adjustments for periods of contracting out of the state second pension and its predecessor.
In 2016/17 only 38% of those reaching State Pension Aa=ge will receive the full £155.65 a week. The new regime creates more losers than winners because its long term cost is lower than its predecessor. Generally, the higher your earnings and the further you are from your State Pension Age, the worse off you will be. It is worth visiting the government pension projection website (www.gov.uk/check-state-pension) to see how much you might receive.
What does this mean for the average Entrepreneur?
Simply put, don’t count on receiving a State Pension.
It is far better to plan for your own retirement and build an asset base that can provide you with an income when you retire and of course your biggest asset is your business. So speak to use and let us show you how to maximise the value of that asset.
Plus, with any surplus cash we can demonstrate a highly effective way to shelter than cash in a tax efficient vehicle that can grow tax free.