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State Pension and SERPS (S2P)

Very few people are aware of how much they will receive from their State Pension, and many are unsure when this will be. However, the State Pension is a critical part of overall income in retirement and it is essential to include it in a Retirement Planning exercise.

Everyone should request a State Pension Forecast, which can be done by post, 'phone or online. The fact that only 30% of women, and 85% of men, receive a full State Pension indicates why so many people are likely to be disappointed. Knowing what you will receive, and when, allows for plans to be put in place to make up any shortfall.

Anybody due to reach State Pension Age between April 2016 and August 2021 can call 0845 300 0168 to get an actual statement of how much they will receive (as opposed to a forecast).

WHAT'S HAPPENING TO THE STATE PENSION?

The government has announced a number of changes that will affect the amount you receive as a state pension. Under this new scheme that would come in in 2016 people who currently receive the lower rate of state pension should be better off. This includes those who are self-employed and women who take time off work to look after their children. There will be winners and losers in this new scheme.

HOW DOES IT WORK AT THE MOMENT?

The basic state pension is £113.10 per week, provided you have clocked up at least 30 years' Nics.

WHAT ARE THE CHANGES ?

A flat rate of £155 per week from April 2016 for anyone with a full 35 years', either via in-work deductions or out-of-work or caring credits, will qualify for the new payment. However, those with fewer than 10 years of contributions will get nothing. In practice, only 3 out of 10 retirees will receive the full amount, with the Institute for Fiscal Studies (IFS) calculating that 70% will get less.

WHAT IF MY OVERALL STATE PENSION IS HIGHER THAN THE NEW PENSION?

If you are contracted in to the state second pension and you expect this to take your overall entitlement above £155 a week, you will receive the lower amount.

WHAT IF I RETIRE BEFORE THE NEW PENSION COMES IN?

It is expected you will qualify for the new flat-rate pension only if your retirement date comes after its introduction in April 2016 at the earliest.

TOP TIP

It is possible to "buy" up to an additional six years of Nics to increase your entitlement to the state pension, if your normal retirement date falls between April 2008 and April 2015 and you already have 20 years' Nics. This is of particular benefit for older women who may have missed years of Nics when they were bringing up children or caring for elderly relatives.

It costs £627 to buy one year's worth of Nics, equivalent to 1/39th of the state pension (£97.65 a week if £5,077.80 a year) for women who retired before April 2010, and 1/30th for those retiring after. In the case of the former, therefore, an outlay of £627 will produce an additional £130.20 a year, and in the case of the latter, it produces an extra £169.26 a year.

Millions of pensioners, and those close to retiring, can boost their incomes under the terms of a generous scheme launched by the government.

The state pension top-up is designed to help those who have not paid enough national insurance contributions during their working lives to benefit from a full state pension.

However, anyone can buy the top-ups, worth up to £25 a week in additional second state pension, including those with a full history of contributions.

The offer is available from October 2015 to about 13m people, including current pensioners and those due to retire before April 2016. This means men currently aged at least 63 and women 61 and over.

The price of the top-ups will depend on age. A 65-year-old will have to pay £890 for an extra £1 a week, or £52 a year. For a 70-year-old the rate falls to £779. At 75 it is £674.

A-65-year-old buying the maximum £25 a week (£1,300 a year) will pay £22,250. The payment will be made through a new class of national insurance contributions (NICs) called "3A".

The top-up is linked to consumer prices index inflation, and will pay 50% of the pension to a surviving spouse or civil partner.

The state pension top-up translates as a 5.8% annuity rate. This is nearly double the current 3.0% for an inflation-linked annuity. If you want a secure income throughout retirement, a spouse's pension and linked to inflation, this is a very attractive offer. It is estimated 250,000 people may take up the offer.

Retirees will have an 18 month window between October 12, 2015 and April 1, 2017 to take up the offer. However, the top-up deal may not make sense for some. People with health issues and a short life expectancy may not benefit, while single people may not value the provision for a partner.

WHO WILL BE BETTER OFF?

According to the IFS, the gains will be largest among those who have spent periods out of the labour market caring for children or who have had long periods of self-employment. The IFS says women will typically gain £5.23 a week, and anyone who has been more than 10 years self-employed will be better off on average by £7.51 per week.

WHO WILL BE WORSE OFF?

The abolition of the earnings-linked pension will leave many workers significantly worse off. with younger employees hit hard. Those whose total two-tier state pension has already exceeded £155 will have to continue paying Nics for years, for which they will receive no benefit. The government is also scrapping the married spouse's pension, which has allowed partners with little or no record to claim a pension using their husband's record.

Finally, those who retire on a state pension of less than £155 a week before 2016 cannot join the scheme.

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