The film Jupiter Ascending is arguably a sci-fi version of Cinderella. Jupiter (Mila Kunis) lives a life of drudgery until she discovers her true destiny. The new state pension rules aim to save those planning for retirement from a life of penny-pinching. In short those reaching state pension age from April 2016 will receive a substantially higher state pension (about £148 per week instead of £113.10 per week) – but they will have to pay National Insurance (NI) for longer to get it. Until April 2016, you can claim a full state pension with 30 years' NI. After April 2016 you will need 35.
A Quick Guide to NI and the State Pension
If you are employed then you will be paying National Insurance and therefore contributing to your state pension. If you are self employed and earning £5,885 or less you can choose whether or not you pay NI. Obviously your choice will affect your entitlement (or otherwise) to a state pension. For those taking a career break to raise children, registering for child benefit will ensure that NI continues to be paid. This means that in terms of an overall financial plan, it can be worthwhile registering for child benefit even if your family's overall income is too high for you to receive any money directly. It could also worth noting that these credits can be transferred to working age-family members who provide childcare e.g. grandparents. In other words, if you are working and therefore building up excess NI contributions through child benefit, you can pass the NI credits from child benefit to other people who actually can benefit from them. This may be a substantial boost to them in terms of their own money management.
A Note Regarding Contracting Out
Under the current system, there is essentially a two-tier state pension. There is a basic state pension and an additional state pension. At this point, under certain circumstances, people can opt out (contract out) of paying NI towards the additional state pension. Put quite simply, as of April 2016, this option will cease. The government has a formula in place for calculating where people who have contracted out stand in terms of NI payments. Anyone in this situation can register at gov.uk (or nidirect.gov.uk) to get a project of their pension entitlement. This could be a useful exercise for other people too.
Alternative Pension Choices
Politicians of all persuasions are united in their concern over the potential effects of an ageing population saving too little for their retirement. Because of this, they are becoming increasingly active in their attempts to motivate people to save in the here and now to pay for their future. Auto-enrolment into a workplace pension scheme (“We're all in”) is one example of this. Of course, any individual's ability to save voluntarily into a pension scheme depends entirely on their ability to meet their needs in the present. It is also fair to say that there are other options for saving for retirement, some of which offer tax efficient options (e.g. ISAs). However, the fact that pension contributions attract at least some degree of tax relief is a clear and potentially significant benefit to saving for retirement through a pension fund. This benefit can be further enhanced with contributions from employers. Therefore, while saving into a pension may not be right for everyone, it is certainly an option which deserves serious consideration.
It's never too early to start saving for retirement and even late is better than never. The more effectively working-age people plan for the time when they will no longer be working, the likelier it is that they will be able to enjoy the experience of being retired.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED