What Do the New Pension Rules Mean for Your Retirement?
The New Pension Rules Explained
The UK currently has one of the most complicated pension systems in the world. As a result, it is often difficult for people to calculate how much they are going to receive from their state pension which in turn makes it hard for many to properly plan ahead for retirement.
To make things simpler the government is implementing changes to the State Pension which will be effective from April 6th this year - £155.65 per week.
Under the new rules if you reach State Pension age on or after April 6th 2016 you will get the new State Pension.This new system will see the end of the additional state pensions (stat second pension S2P) and the state earnings related pensions scheme (SERPS).
Will The New Pension Rules Affect You?
I already receive my state pension
If you are currently receiving a state pension the new changes will not affect you. You can however top up your state pension by up to £35 per week by using the new State Pension Top Up Scheme or paying National Insurance.
I'm a man born before 6th April 1951 / I'm a woman born before 6th April 1953
If you fall into one of the above categories your state pension will be paid following the current (old) system, even if your defer
I'm a man born on or after 6th April 1951 / I'm a woman born on or after 6th April 1953
If you fall into one of these two categories you will receive the new State Pension. If you already began building a state pension in the current system this will be converted. If you haven't started building a state pension by April 6th your state pension will be calculated entirely through the new system.
Key Changes to Pensions
RELIANT ON NATIONAL INSURANCE
One of the key differences to the State Pension is that it will based on your National Insurance record alone. To receive the maximum new State Pension you are required to have a 35 years NI record.
Another key change is the way in which a pension can be drawn. Under the old rules you typically received a 25% tax free lump sum and then drew an income from the remainder (through either an annuity or drawdown). From April 6th, those in the new system can access money purchase pensions in their entirety.
The lifetime allowance for pensions will reduce from £1.25 million to £1 million.
Alternatives to a State Pension
It is unlikely that even the new State Pension will provide enough annual income for you to live a comfortable lifestyle. For many people it is crucial to supplement their state pension with other savings to generate a healthier income for retirement. Some other ways to generate an income in retirement include:
DOWNSIZING / RELEASING EQUITY FROM PROPERTY
If you own a property that is no longer required for your needs (e.g. if your children have now left home) you may benefit from downsizing and moving into a smaller house. If you don't like the idea of selling your home you may prefer to try equity release to take money out from the value of your home to enjoy in retirement.
Using an ISA as a savings tool is a great way to put away extra money. By saving £100 a month into an ISA for 26 years at an interest rate of 5% you can generate a pot of £50,000.
PRIVATE PENSION / COMPANY PENSION
If your current employer offers a pension scheme then you should join, as they will match any contributions you make (up to a certain value). You can view this as essentially a pay increase over time.
You may also be better suited to starting a private pension pot if you are self employed, aren't working but can afford to pay into a pension scheme, or if you would like an additional way to save on top of your company pension contributions.
Retirement income options - The Money Advice Service
Pensions and their rules leave many people confused. Everyone's situation is unique and you should make decisions that will be the best outcome for your circumstances. The government has introduced Pension Wise a free and impartial service to help understand the options for your pension pot. However to get proper pension advice tailored to your needs, you should speak with a financial advisor who will be able to advise you the best route for saving for your retirement or accessing your pension pot.