pensions

Is a Lifetime ISA a Good Way of Saving for Retirement?

Is a Lifetime ISA a Good Way of Saving for Retirement?

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I’ve talked about pensions a few times on this blog (in this post about the state pension, for example).

Today I’m looking at another possible way of saving for retirement, the Lifetime ISA (or LISA for short).

LISAs were launched in April 2017 with the aim of encouraging younger people to save. Despite some rumours they might be changed or even abolished, in his budget yesterday Chancellor Philip Hammond left them untouched. That’s good news, as LISAs offer some attractive bonuses and tax advantages for savers. They do have one big drawback for older people, though – you have to be under the age of 40 (though over 18) to open one.

Of course, I know many readers of this blog are older than that – but even if you are, this saving scheme may still be relevant to your children or grandchildren. So here are the basics you need to know…

Understanding LISAs

LISAs are designed for two specific purposes: buying your first home and saving for retirement.

How they work is that you can pay in up to £4,000 a year (lump sums or regular contributions) and the government will top this up with another 25%. As long as you open your LISA before the age of 40 you will continue to receive the bonuses on your contributions until you reach 50.

So if you pay in the maximum £4,000 in a year, the government will top this up to £5,000. If you pay in the full £4,000 every year from the age of 18 to the upper limit of 50, you will therefore get a maximum possible bonus from the government of £32,000.

LISAs are available from a small but growing number of providers (see below). As with ordinary ISAs, you can choose a cash LISA or a stocks and shares LISA (though not yet an innovative finance LISA). Note that the money you invest in a LISA counts towards your annual ISA allowance, which in 2018/19 (and also it’s just been announced 2019/20) is £20,000. So if you were to invest the maximum £4,000 in a LISA this year, you would be able to invest a maximum of £20,000 – £4,000 = £16,000 in an ordinary cash ISA, stocks and shares ISA and/or IFISA.

Your money will grow without any tax deductions in a LISA, and you can also withdraw without having to pay tax (though see below for restrictions).

Where Can You Get a LISA?

There are about a dozen LISAs on the market at present. There are three cash LISAs, available from the Skipton Building Society, Nottingham Building Society and Newcastle Building Society. The latter has only just launched and pays the highest interest rate of 1.10 percent at the time of writing, paid monthly.

If you’re using a LISA to save long term for retirement, a stocks and shares LISA will probably be a better option. Providers of stocks and shares LISAs include Hargreaves Lansdown, The Share Centre, and the online-only Nutmeg. I wrote about my experiences investing in a stocks and shares ISA with Nutmeg in this blog post.

So What’s the Catch?

Unfortunately, there are several.

One is that (as mentioned above) you can only use the money in your LISA for one of two purposes – paying a deposit on your first home or saving for retirement.

While you can access your money for other reasons, you will then lose 25% of the total, including your own contribution and the government bonus along with any investment growth. That means in many cases you will get back less money than you put in. (There is one exception to this rule, which is that you can withdraw all the money without deductions if you are terminally ill with less than 12 months to live.)

Also, unless you’re buying a first home, you can’t withdraw your money without penalty until you reach the age of 60 – unlike workplace and personal pensions, which you can access unrestricted from 55 onwards.

Another drawback may be that unlike pensions, money in a LISA will count if you have to apply for any means-tested benefits. So you could be required to withdraw your LISA savings (paying the 25% penalty) and live off those until your savings are below the means-testing threshold. LISAs also count as assets in bankruptcy or divorce cases.

Pensions Versus LISAs

For most people, pensions are likely to be their first and best choice for retirement saving.

A workplace pension in particular will benefit from employer contributions as well as tax rebates from the government. That combination is hard to beat, especially if you pay tax at the higher rate. Definitely don’t opt out of your workplace pension in favour of a LISA.

Nonetheless, if you have some spare cash you can afford to save in addition to your pension, opening a LISA is worth considering. It’s also a decent option if you don’t have a workplace pension – perhaps due to being self-employed – and you don’t pay higher-rate tax.

In any event, if you want a LISA and are approaching 40, don’t hang about. You can open a LISA for as little as a pound, and can continue to make contributions and receive the government top-ups till you are 50. The money will then carry on growing in your LISA and provide a nice little nest-egg for your 60th birthday!

As always, if you have any comments or questions, please do post them below.

Fidelity SIPP

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Link: how to Manage Your Money in Older Age

Link: How to Manage Your Money in Older Age

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A quickie today to let you know about a useful article titled “How to Manage Your Money in Older Age” on the Age UK Mobility and Handicare website.

The article includes advice on managing your money in later life from a number of UK money bloggers, including yours truly. As a matter of interest, here are the tips I provided, both of which are quoted in the article.

What would your main advice be for an older person wanting to manage their money well?

Don’t bury your head in the sand where money matters are concerned. Keep a close eye on your income and expenditure, and always be on the lookout for ways you can maximize the former and minimize the latter.

Just one example – use a comparison service such as Uswitch.com to see if you could save money on your energy and other utility bills. By switching to cheaper suppliers you could save hundreds of pounds a year for just an hour or two spent on the computer.

What financial mistakes do you think are most common for older people and what can be done to avoid them?

Sometimes with older people pride gets in the way of asking for help and support. That’s understandable, and in its way admirable. But for older people (especially those on low incomes) there are various welfare benefits they may be able to apply for – from Pension Credit and Council Tax Reduction to Attendance Allowance and Warm Home Discount. Nobody will come knocking on your door offering them, though! You need to be proactive about researching what you may be eligible for, perhaps using an online service such as www.entitledto.co.uk. Don’t then let misguided pride prevent you from applying. This is money set aside by the state for people in your situation and can potentially make later life a lot more comfortable for you.

I hope you enjoy reading the article – here’s the link again – and find the tips (including mine!) helpful. As always, if you have any comments or questions, please do post them below.

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My Experience of Putting my Pension into Drawdown

My Experience of Putting My Pension into Drawdown

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I recently decided to take the plunge and put my personal pension into drawdown. As I know many Pounds & Sense readers will be thinking about doing this (sooner or later), I thought I would share my experience of the process here.

To give you some background, I am 62 and a semi-retired freelance writer. I still do some writing work – and run this blog! – but that doesn’t in itself produce enough income to live on. I am fortunate to have some savings and investments, but won’t qualify for my state pension until I am 66 (in about three-and-a-half years).

I do have a SIPP (Self Invested Personal Pension) with Bestinvest, though, so I decided I would put this into drawdown to give me another source of income. As you will know if you read this recent post, drawdown is one of the options open to you if you have a defined contribution pension. Once you are 55 or older, you can withdraw a quarter of your pension pot tax-free and (if you opt for drawdown) take a taxable income from the remainder. The balance stays invested until you withdraw it, and hopefully continues to grow.

Mine is not a massive pension pot – it came to about £56,000 – but my financial adviser and I worked out that if I draw £200 a month, assuming average growth of the remaining investments in my portfolio, it should last me until I am well into my 80s. I will also have the option to reduce the amount I draw once my state pension kicks in and/or to top up my pension fund to a modest degree in later years (see below). Yet another option will be to use the balance in my pension pot 10 to 15 years down the line to purchase an annuity, by which point the rate available on this will be higher.

The Process

I have been managing my SIPP online for over 10 years, but there wasn’t much on the Bestinvest website about how to put it into drawdown. So I phoned them up and asked.

The woman I spoke to said they would email an application form. This duly arrived as a PDF. I was pleased to discover that I could complete it on my PC (I use the free Foxit Reader for reading and editing PDFs).

The form had 10 pages. As well as the usual personal information, it wanted to know how much I wanted to draw from my pension and at what intervals. It also asked whether I wanted to take the tax-free lump sum straight away (I said yes).

The other things the form asked were a bit less predictable. There were quite a lot of questions about other pensions I might have. This didn’t apply to me, but they have to ask in order to check that you aren’t exceeding your lifetime allowance of just over a million pounds (I wish!).

The form also asked whether I had taken advice from the government’s Pension Wise service and/or an independent financial adviser. This did strike me as a bit nanny-ish, but as it happened I was able to say yes to both.

Clarifications

There were a few things I wasn’t clear about, so I phoned Bestinvest back and asked them. Here’s what I discovered. I hope this information may be useful to anyone who is in this situation or will be soon, as it doesn’t seem to be widely known.

First of all, I assumed that when paying out from my pension, my provider would simply sell off funds on a pro rata basis (I have about a dozen funds and shares in my pension account). This turned out not to be the case, though.

The woman at Bestinvest explained they don’t do this, as people often have their own views on which funds they want to sell and which they want to keep long term. So she told me I should sell enough funds via the BI website to cover my lump sum and also to cover my monthly payments going forward. To avoid delays she advised me to do this as soon as possible.

I therefore sold around £15,000 worth of funds from my account, to cover the lump sum I was withdrawing and the first few monthly payments. As the months go by I will obviously need to sell more of my holdings, but hopefully the cost will be balanced to some extent by the value of my remaining holdings going up.

I also discovered that my online account would continue to function exactly as it did before going into drawdown. The only difference is that the government imposes a lower limit of £4,000 (including tax relief) for any further investments in a SIPP after you have “crystallised” your pension (i.e. started drawing a taxable income from it). This rule is to avoid people withdrawing large sums and immediately reinvesting them to get another big chunk of tax relief, which I guess is fair enough. In any event, it’s good that I will have the ability to top up my pension from my other savings and investments by a few grand a year in future if my remaining pot starts to shrink too much.

After all this I submitted my form, and everything so far has gone as promised. It took about a month for the tax-free lump sum to appear in my bank account, and around six weeks to get my first monthly payment. I had heard some horror stories about large “emergency deductions” being made from the latter by HMRC to cover any possible tax liability, but discovered they weren’t applying any deductions at source to my payments. Of course, I will have to add this money to my total taxable income for the year, and if it exceeds my personal allowance I will have to pay tax on it.

So that was my experience of putting my Bestinvest SIPP into drawdown. As of August 2018, I can legitimately describe myself as a pensioner! If you have any comments or questions, naturally, please do post them below.

Disclosure: This post includes affiliate links. If you click through and perform a qualifying transaction, I may receive a commission for introducing you. This will not affect in any way the product or service you receive.

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Infographic: Boost Your Pension Pot by Insulating Your Home

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Today I am sharing with you an infographic provided by Insulation Express, a UK company that supplies home insulation materials of all kinds.

Although nobody is going to save enough money to fund their retirement just by fitting insulation, the potential savings on fuel bills certainly give food for thought.

As you will see, the earlier you start, the bigger the potential savings. But even people who are already retired can make substantial savings by insulating their lofts, floors and/or walls. Payback periods vary according to the type of insulation (and what insulation you had before, if any) but as the graphic shows, they can be as short as two years.

Boost Your Pension Pot By Insulating Your Home

Thank you to Insulation Express for an attractive and thought-provoking graphic. More information about the cost-benefits of cavity wall insulation can be found here, with information on solid wall insulation here and loft insulation here.

You might also like to check out my recent blog post about how to save money on your energy bills.

As always, if you have any comments or questions about this post, please do add them below.



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What Should You Do With Your Pension Pot When You Retire?

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In recent posts I’ve discussed various aspects of saving for your retirement, including the state pension and how to trace lost or forgotten pensions.

Today I’m going to discuss what happens when that fateful day arrives.

Most pensions nowadays, workplace and private, involve building a ‘pot’ that can be turned into regular income in retirement. This is known as a defined contribution pension.

  • There are also still some defined benefit pensions, where on retirement you receive a set income based on the number of years you have been contributing. These are generally regarded as the ‘gold standard’ for pensions, and you should think long and hard (and get independent financial advice) before cashing one of these in for a lump sum.

If you have a defined contribution pension, in this post I will look at what you can do with your pot once you are ready to start drawing an income from it. Following George Osborne’s 2014 pension freedom reforms, in most cases you can do this from age 55 upwards.

There are four main options. I’ll run through them now.

(1) Keep Your Pension Invested

There’s no obligation to start taking an income from your pension at any particular age. If you don’t need the money, therefore, there’s a case for letting it carry on growing tax-free until such time as you do.

(2) Buy an Annuity

This is the traditional method of funding your retirement. Using your pot to buy an annuity gives you a guaranteed income for life.

How much you will get depends on various factors. These include how much is in your pot, your age, whether you want your income to go up every year, and whether you want to pass on the annuity (e.g. to your spouse) when you die.

Annuity rates in recent years have been relatively low, though you may be able to get a higher quote if your health is poor (as the company doesn’t expect to have to pay out for as long!).

The government lets you withdraw 25% of your pension pot tax free, and the rest can be used to buy an annuity. Annuities are taxable, so depending on your other income, tax may be deducted before you receive your payments.

To get a rough idea how big an annuity your pot will buy, you can use the online calculator on the government’s Pension Wise website. When I tried this with a sample pot of £100,000 and taking an income at 62, I got a quote of £25,000 tax-free cash and a taxable annual income of £3,300 (£275 a month) for life.

(3) Take the Money in Chunks

Another option (from age 55 onwards) is to withdraw money from your fund in chunks as and when you need it. If you do this, 25% of each withdrawal will be tax free and the rest will be taxed along with any other income you earn. Not all pension providers currently offer this option.

(4) Use Flexible Drawdown

This is becoming a very popular method. Flexible drawdown involves taking money from your pot to provide a regular monthly income, while leaving the rest invested, hopefully to continue growing.

With flexible drawdown, you can withdraw 25% of your pension pot as a tax-free lump sum. The rest is then used to provide a regular, taxable income.

The process is quite straightforward. You simply notify your pension provider (or self-investment platform) that you wish to go into drawdown. They will then arrange this for you (for which a fee may be payable) and ensure that a payment goes into your bank account the same day every month from then onward.

You can keep your money in the same investments as before or take the opportunity to adjust them (perhaps switching to funds with lower charges). You can set the monthly income at any level you like and vary it any time as well, although again there may be charges for doing so.

As well as its flexibility, the drawdown option has the benefit that the remainder of your money stays invested and can continue to grow tax free.

The main risk, of course, is that your money will run out before you die. This isn’t a precise science as it depends on two things that are impossible to predict accurately – how long you will live and how well your investments perform.

When deciding how much it’s safe to draw every month, it’s therefore essential to take into account how long you expect to live in retirement. A 65-year-old man in Britain today has a 50% chance of living to the age of 87 and a 65-year-old woman to the age of 90. So you may easily have 30 years in retirement, or even longer.

As for what rate investments may grow, in the current investment climate an estimate of around 4% a year is considered prudent – but in reality, obviously, your investments may do better than this, or they could do worse.

Again, the Pension Wise website has a calculator that will give you a rough idea how much you can safely draw from your pension pot and how long it is likely to last. There are no guarantees, though, so if you opt for drawdown it’s important to review your arrangements regularly and adjust them as appropriate.

Other Options

The above are the main options, but there are others as well.

If you wish, from age 55 you can withdraw your whole pension pot. Again a quarter of this will be tax free and the remainder treated as taxable income in the year concerned. If you have a substantial pot, this could result in you being pushed into a higher tax-rate bracket that year, so this course of action is not generally recommended. The one time you might want to do it is if you have a small pension pot and/or debts you want to pay off.

You can also mix and match. For example, if you have £200,000 you could draw £50,000 in tax-free cash, put £50,000 into an annuity for a secure life-long income, and leave the rest in a drawdown product for continuing growth. There is actually much to be said for having a variety of income streams in retirement.

Final Thoughts

Even if you’re not near the stage of drawing your pension, it’s still important to understand how the system works and plan accordingly. Nobody wants to end up having to rely on the state pension to fund their later years.

If you ARE getting close to retirement, I highly recommend speaking to an independent financial adviser to discuss your specific circumstances and needs. If you’re over 50 you can also book a free telephone or face-to-face appointment with a Pension Wise adviser. They will go through the options with you and answer any questions you may have.

In any event, though, it’s important to plan carefully to take advantage of the range of tax-efficient saving and investing opportunities on offer, and ensure that when the time comes you have enough money to enjoy your ‘golden years’ rather than struggle through them.

Good luck, and I wish you a long, happy and prosperous retirement!

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Property versus pensions - which is best?

Guest Post: Property Versus Pensions – Which Is Best?

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Ever worry that your pension isn’t large enough to sustain the kind of retirement you’re looking forward to?

On average, British pensioners receive just 29% of their in-work earnings.

This small sum would leave many of us struggling to pay the bills, let alone being able to afford those long-awaited family holidays or treats. Latest figures from the Organisation for Economic Co-operation and Development show that 18.5% of those aged 76+ in Britain are living in poverty.

Those dependent on state funds are the worst affected and, with pensions failing to provide a sufficient income, many retirees rely on property as an alternative source of income.

Buy-to-let property is a big commitment, both in terms of the capital you need to get started and the long-term nature of the investment. Many of us look forward to relaxing during retirement, and there really is no guarantee of ‘a quiet life’ when you invest in rental properties.  If you were planning to invest all your savings in property, it’s essential to consider how your finances would hold up should the property become vacant or need substantial repairs.

If house prices fall or stagnate, you could be left responsible for a property portfolio that contributes only a minimal amount towards your retirement income. Even if the housing market continues to boom, your personal circumstances may change and, as property is an illiquid asset, it can be tricky to turn your investments into cash at short notice.

So, if you’re in search of a way to supplement your pension and bring your retirement dreams a little closer to reality, you’ll be pleased to know that buy-to-let isn’t the only way to invest in bricks and mortar…

Kuflink’s innovative peer-to-peer platform offers investors many of the same advantages as buy-to-let, including monthly interest payments and property-backed opportunities, without the hassle of maintenance or deposit costs!

Register today to view Kuflink’s portfolio of exclusive short-term property loans offering up to 7.2% interest pa gross*, and invest from just £100.

*Capital is at risk. Rate correct as of April 2018. You should seek independent financial advice.

 

Thank you to my friends at Kuflink for an interesting post. I would just like to add that I am an investor with Kuflink myself and so far have been pleased and impressed with the service received.

As an existing Kuflink investor, I can also offer a special cashback incentive for anyone signing up and investing on the platform via my link. If you click through this special invitation link and invest a minimum of £1000, you will receive cashback as follows:

Investment amount Cashback due
£1,000 – £5,000 2.50%
£5,000.01 – £25,000 3.00%
£25,000.01 – £50,000 3.50%
£50,000.01 – £99,999.99 3.75%
£100,000 4.00%*

*Cashback capped at £4,000

And yes, you really can earn up to £4,000 in cashback. If you invest £100,000 or more, then in addition to the £4,000 cashback, you would receive interest of around 6% to 7%. That means over a year your total returns on your £100,000 investment would be at least £10,000 (and more if you reinvest the monthly interest repayments on Select-Invest loans). Food for thought if you have that sort of money, though admittedly not many of us are lucky enough to do so!

Note that once you make your first investment of at least £100, you will have 14 days to maximise your cashback by making further investments. The 14-calendar day window starts from the moment you make your first investment. There is no limit to how much money you can invest in this window, and the cumulative total of your investments made within this 14-day period will be the total amount eligible for cashback.

The cashback amount will be transferred six months after your first live investment is made (assuming you haven’t sold up via the secondary market in that time). If Kuflink withdraw this offer after you have invested and before your cashback has been paid, you will still receive the cashback reward. The cashback will be paid into your Kuflink wallet, and from there you can either withdraw it to your bank account or invest it in another Kuflink loan or product.

As your referrer via this link or the link above, I will receive a referrer’s fee (variable) if you invest £1000 or more. Note also that once you have invested you will be able to offer the same cashback deal to your friends and colleagues, and get a referrer’s fee yourself as well. There is no limit to the number of people you can introduce through this scheme.

Obviously, this is a generous promotional offer by Kuflink and I assume it won’t be available forever. If you want to take advantage, therefore, don’t wait too long. I will remove this information if/when I hear the offer is no longer valid.

As always, if you have any comments or questions about this post, please do leave them below.

Disclosure: This is a sponsored post by Kuflink, for which I am receiving a fee. As stated above, I am also an investor with Kuflink myself.

Update:: I have now added an independent review of Kuflink based on my experiences of investing with them. Click here to read it.

Kuflink

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How to track down your lost pensions

How to Track Down Your Lost Pensions

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Today I want to talk about what happens when you have several pensions from different periods in your career.

For most of us, the days of “a job for life” are long gone. People now have an average of eleven different jobs during their working lives, and it’s common to start a new pension at each workplace.

You can thus accumulate a number of pensions and it can be easy to lose track of and even forget about some of them.

Tracing Lost Pensions

In most cases, thankfully, tracing old pensions isn’t too difficult.

For one thing, all pension providers are legally required to send you an annual statement showing how much your pension is worth and how much income it could provide in retirement.

If you’re no longer receiving these statements, maybe because you’ve moved a few times, there are various options open to you.

The first thing you should do is contact your old employer in the case of a workplace pension, or the pension provider in the case of a private pension. When contacting a previous employer you will need to provide as much of the following information as possible:

  • Date of birth
  • National Insurance number
  • When you started and stopped working for the company
  • When you joined and left the pension scheme

With a private pension provider you will need to provide:

  • Plan number
  • Date of birth
  • National Insurance number
  • Date your pension was set up

Obviously if you don’t have all this information it’s not the end of the world, but it may be harder for the scheme managers to track your pension down.

Ask the provider for as much information as possible about the pension. This should include what type it is (e.g. defined benefit or defined contribution), how much is currently in the pot, how much income it’s likely to provide in retirement, and (very importantly) whether it’s possible to transfer the pension to another provider and any charges this would incur. The Money Advice Service has template letters you can use when writing to a former employer or private pension provider for this purpose.

The Pension Tracing Service

But what if you’ve lost track of a pension and don’t have contact details for the provider? In that case, the government’s free Pension Tracing Service may be able to help.

All you need to know to use this is the name of your previous employer or pension provider. But before contacting the PTS, gather as much information as you can about the employer and/or the scheme, including the information mentioned earlier.

You can then call 0845 600 2537 or visit the PTS website and they will check your information against their database of over 200,000 pension schemes. They should be able to give you details of the scheme’s administrator, and you will need to contact them for further information as above.

Note that the PTS will only give you contact details for your scheme’s administrator. They won’t tell you whether you have a pension or what it is worth.

Consolidating Pensions

Rather than having lots of small pensions, it can make sense to consolidate them in a single pension.

This will simplify the admin and make it easier for you to see how much you have in your pension pot and what income it may be able to provide for you in retirement.

In addition, if you combine your pensions, you can choose a new one that can be easily managed online. You could, for example, use a self-investment platform such as Hargreaves Lansdown, Fidelity or Bestinvest (which I use myself). Another possibility is PensionBee, which specializes in consolidating multiple pensions into a single one you can manage online 24 hours a day.

You can then log into your account from any device to check your balance, make a contribution or see your projected retirement income. And you can choose an investment plan that has lower fees and is aligned with your expectations and attitude to risk.

To consolidate your pensions you will need to contact the providers to get transfer values, and then ask them to transfer the funds into your new scheme. This is generally a simple, straightforward procedure, though it can take a few weeks (or longer) for the transfers to go through.

Boosting Your Pension

Finally, here are a few more ways you may be able to boost the size of your pension.

  • Increase your state pension by deferring taking it (see this recent post).
  • You may also be able to increase your state pension by making additional National Insurance contributions to fill in missing years from your record.
  • Set up a private pension and/or pay extra contributions into your workplace pension, up to the maximum allowed.
  • Set up an ISA and/or LISA (under 40s only) for additional tax-free saving.
  • Consider peer-to-peer lending and/or property crowdfunding as further ways to diversify your retirement saving.

Finally, if you’re a house owner aged 55 or over, you may be able to use equity release to extract some of the value of your property, either as a lump sum or a monthly income. Most commonly, this involves taking out a mortgage on your home which is only repayable when you die or move into long-term care. I wrote about equity release in this recent post.

As ever, if you have any comments or questions about this post, please do leave them below.



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How to Check What Your State Pension Will Be

How to Check What Your State Pension Will Be

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Today I thought I would discuss the state pension. This is a subject that concerns everyone, but may be of particular interest to readers of this blog who are approaching retirement age.

Of course, many people have one or more workplace or private pensions. However, the state pension is still a very important component of most people’s income in later life.

And unlike many workplace/private pensions, it rises automatically every year at the rate of inflation or above (under the current triple lock guarantee). That makes it increasingly valuable as you get older.

In this article I’ll be revealing how to check how much state pension you are due and when. But I’ll start with a look at the various changes to the state pension in the last few years and how they affect anyone coming up to pensionable age now.

Speaking of which, let’s start with one of the biggest changes…

Your State Pension Age

It’s unlikely to have escaped your notice that the pension age is rising. At present men can access their state pension at 65 while women get it at around 64. The age for women is in transition at the moment as it rises to equalize with men in 2018.

By 2020, the pension age for both men and women will go up to 66. Between 2026 and 2028 it is due to rise again to 67, and under current government plans it will go up again to 68 in 2037.

You can check when exactly you can start to claim the state pension by entering your date of birth and gender at this government website.

The New Flat Rate Pension

This is the other major change to the state pension in recent years.

Prior to April 2016 everyone received a basic pension (currently £122.30 a week). This was (and still is) topped up by additional state pension elements (S2P and Serps) which you accrued during your working life.

Anyone retiring from April 2016 onwards now receives a ‘flat rate’ pension currently worth £159.55 a week. If, however, you ‘contracted out’ of S2P and Serps at some point in your working life, you may get less than this. The presumption is that your contracted-out pension will provide another source of income for you, so you don’t need (or qualify for) the full flat-rate pension.

A further complication is that the government doesn’t want people who accrued large state pension entitlements under the old scheme (basic pension plus S2P and SERPS) to miss out. So when you reach pension age your entitlement under both the old and new methods of calculation will be worked out and you will receive the larger of the two. That means some people could actually qualify for more than the new flat-rate pension (£159.55 currently). If this is the case, it will be shown separately as a ‘protected payment’ on your state pension statement.

Also, to get the maximum new flat-rate pension you need to have at least 35 years of qualifying National Insurance contributions at the full (non-contracted-out) rate. If you have less than that you will get a reduced pension; and if less than 10 years, nothing at all.

In some circumstances – which I’ll discuss shortly – you may be able to pay a lump sum to fill in gaps in your record. Even if you do have 35 years or more of contributions, though, it may not entitle you to a full pension. The government website (see below) tells me I have 37 years of contributions, but because I was contracted-out for some of these years and so paying a lower rate of National Insurance I still have to contribute for another three years to get the full flat-rate pension. Here’s a screen capture of my actual statement:

State pension statement

If you’re confused by all this, I’m not surprised. The rules are complicated and still being tweaked. So to avoid any nasty surprises it’s important to check what you are due to receive as well as when you are due to do so. There is now an official website where you can access all this information in one place.

Checking Your State Pension

Anyone aged 55 or over who has lived and worked in the UK for 10 years or more (even if they are not British citizens) can now visit https://www.gov.uk/check-state-pension to get an estimate of how much state pension they will receive when they retire.

Doing this is a bit more involved than just checking your start date on the pension age site mentioned earlier. You have to sign in with proof of identity, so allow a bit of time for this. If you already have an HMRC online tax account, the good news is you can use this to log in.

Once you’ve done so, you will see a forecast of how much state pension you will get once you’re eligible to start receiving it. This is based on current figures, so if you won’t reach retirement age for a few years yet, it will of course have risen by that time.

Boosting Your State Pension

If you’re disappointed by the amount forecast, one thing you can do to boost your state pension is defer taking it. Under the new rules you will receive an extra 1% for every 9 weeks you put off claiming.

Obviously, to benefit from this overall you should be in good health. For women especially, as their life expectancy tends to be a few years longer than men, deferring your pension (if you can afford to do so) could well be a profitable option. In a way this is a form of investment, underwritten by the government.

No special action is required to defer taking your pension. You just delay claiming and it will be assumed that you wish to defer it.

Another thing you may be able to do to boost your state pension is buy extra voluntary contributions to fill in any gaps in your record. Buying a year of extra contributions (normally Class 3 National Insurance) costs around £733 and will boost your pension by around £230 or £4600 over a 20-year retirement. This can be well worth doing if, for example, you were contracted out for several years.

There are some restrictions, however. In particular, as a general rule it must be done within six years of the end of the tax year concerned. So if the gaps in your record go back further than this, it’s unlikely you will be allowed to make up the whole shortfall in this way.

There’s also the question whether paying voluntary contributions to fill gaps in your record will be cost-effective for you. There is no easy way of calculating this, and I highly recommend getting advice from an independent financial adviser specializing in pensions if you are thinking of going down this route. It’s also a good idea to contact the government’s Future Pension Centre to find out what your options are.

Finally , it should be said that while the state pension provides a baseline income (currently equivalent to around £8,300 a year), on its own it won’t stretch to many (or any) luxuries. Most people will have private or workplace pensions and perhaps other investments as well, and this will be very important if you hope to enjoy your retirement rather than merely survive it. I will look at these in more detail in future posts.

As ever, if you have any comments or questions on this post, please do leave them below.



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