Saving for retirement is something that plays on many people's minds as they get older, and for many, the idea of life on a state pension is a worry. Furthermore, the Government has proposed a flat-rate pension of £144 (in today's money) to be introduced in April 2016, which could potentially make life even tougher for some.
The second state pension
The current second state pension is designed to give you an extra pot of money to use during retirement, and is based on your National Insurance contributions as with the basic state pension. How much you will get will depend on how much you earn, your employment status, and whether you claim certain benefits. You will not be eligible if you're earning less than the lower earnings limit, currently £5,772, you are self-employed, unemployed or in full-time training. And if you are a member of a contracted-out pension scheme via your employer, you will not be contributing to the second state pension and will not receive it.
If you have a child under 12 and are claiming child benefit, are employed and earning more than the lower earnings limit, claiming carer's credit or receive certain benefits due to an illness or disability, it is likely that you will automatically get the second state pension. For the year 2014/15, this amounts to a £163-a-week boost to your basic state pension, currently £113.10.
Under the new flat-rate pension scheme plans, the second state pension will be abolished, but if you have already built up contributions you may still be entitled to benefit from those.
Delay taking your pension
At the moment it is possible to delay taking out your basic state pension, which could mean a bigger income later on, according to the Money Saving Expert site. For instance, if you continue to work after reaching the state pension age, the current rules allow you to defer claiming your pension, which could give your retirement income a significant boost. In fact, for every five weeks you delay claiming, your weekly retirement income will be increased by one per cent.
For those who started their deferment after 5 April 2005, there is also the option to take part of your pension as a lump sum (which is taxable), which allows you to take your deferred payments plus interest of two per cent above base rate. However, as of 2015, anyone reaching retirement age will be able to take their entire pension as a lump sum rather than being forced to buy an annuity, which pays an income for the remainder of your life, if they so wish. If you fall into that new system, just be careful - you don't want to blow your savings in one hit and then find yourself struggling with day-to-day living.
Buy more qualifying years
Under the current scheme, you will need to have paid NI contributions for 30 years, and this is due to increase to 35 when the new scheme comes in during 2016. But at present if you missed some years, it is possible to replace them by 'buying' more pension years, and it could make a significant difference to your income when you retire. HMRC should send notices to those with gaps in their contributions, but if you are unsure, you can check online by getting a State Pension Forecast or calling the Future Pension Centre on 0845 3000 168.
In order to buy extra years you must pay class 3 NI contributions on the previous six tax years. The prices vary, however, depending on when you buy those years, so generally it is best to move fast in order to pay less.
Those who have reached or will reach the age of retirement between April 2008 and April 2015 may be eligible to buy a further six years, but must have at least 20 qualifying years in order to do so. You will have six years from the date you reach pension age to pay.
If you have very few qualifying years, it may not be possible to buy enough years to reach the threshold, and for others, buying extra years may not be the best option. For example, under the current scheme, if you're married and one or other partner has not built up enough for their own state pension, they are still able to claim a pension of £67.80 per week based on their partner's payment record. Should buying extra years provide less than this 'couple's pension', it really isn't worth the trouble or expense.
For those on a low income who are unable to buy enough qualifying years to get the full state pension, pension credit may be available to boost your retirement income. This is based on your income level and any savings you may have. To find out it you can claim pension credit, call the Pension Service on 0800 99 1234 or download an application from the Government website.
This above advice is based on current pension rules in 2014-15. If you are hoping to boost your pension before retirement, it is important to remember that things will change radically in 2016. Though the Government has claimed that those who are already boosting their fund will still benefit under the new rules, it is worth checking exactly how the reforms will impact your pension. Visit www.gov.uk for more information.
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