There is less than a year until a radical overhaul of the State Pension takes place, but many people approaching retirement have no idea how the changes will affect them.
A survey by Saga has found that a third of over-50s don’t know whether they will be better or worse off when they retire once the new flat-rate State Pension comes in next April.
The new pension will be more generous for the lower paid and less so for higher earners, but the public perception is the reverse. Just 28% of low earners believe the new pension will be more generous whereas 36% of high earners think they will be better off.
How the State Pension works now
At the moment those who qualify for a State Pension start to receive payments in their 60s. The exact age varies as it is being equalised for men and women and will be 66 for both sexes by 2020, then 67 by 2028.
The most anyone can get in State Pension is currently £115.95 a week.
It gets complicated though as some people can also claim the State Second Pension, also known as the Additional State Pension. This is an earnings-related additional pension.
Other people may qualify for an additional means-tested top up known as Pension Credit.
How much State Pension you receive depends on how long you have worked for and the number of National Insurance qualifying years you have. If you hit State Pension age on or after 6th April 2010 then you need to have 30 qualifying years to receive the full basic State Pension. If you reached pension age before April 2010 then a woman needed 39 qualifying years and a man 44 years.
On top of that, there are additional rules regarding spouses and the over 80s. So, you can see why the system needed simplifying.
It is also possible for some people to increase how much State Pension they are entitled to by topping up their National Insurance credits. But Saga’s survey found that only 7% of over 50s were aware of this rule.
If you aren’t sure what you are entitled to read How to Get a State Pension forecast.
How it is changing
Under the new rules, the means-tested elements of the State Pension are being abolished. Instead there will be a universal payment for everyone who has hit their State Pension age and has 35 years of National Insurance contributions.
The low-paid, self-employed and people who have spent periods out of work will benefit the most from the new State Pension. In the past these groups didn’t build enough National Insurance credits to qualify for the state second pension, but with that now eliminated all their credits will go towards the single tier pension, meaning they will receive more under the new system.
The reverse is true for high earners. They will no longer be able to build up credits towards that second tier of pension and will instead receive the flat rate just like everyone else.