Three big pension changes on the way: How will they affect you?
Pensions are often seen as complex, and they have undergone big changes in recent years. But more are on the way which could impact your retirement income or your eligibility for the state benefit.
Here are three pension changes and deadlines you need to be aware of in the coming months:
1) Deadline to plug National Insurance gaps extended
People approaching retirement who may have gaps in their National Insurance record have been given more time to plug these shortfalls dating back to 2006 in order to help them receive the maximum state pension possible.
Earlier this week, HM Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP) confirmed special rules allowing taxpayers to plug these gaps going back an extra 10 years on top of the usual six tax years had been extended. The original deadline was 5 April 2023, but it has now been pushed back to 31 July 2023 due to the overwhelming demand faced by the Government.
Under current new state pension rules (affecting those who retire on or after 6 April 2016), retirees need at least 10 years of National Insurance Contributions (NICs) to qualify for a state pension, and 35 qualifying years to receive the full amount (currently £185.15 a week).
Ordinarily, pension savers can fill in NICs gaps dating back six tax years in a bid to boost their retirement income from the state. This means that 2016/17 would normally be the furthest year which could be revisited in the current 2022/23 tax year. As people can fill gaps going back to 2006, those with many missing years have been given a rare opportunity to fill them. That is, if they can afford to do so in the current cost-of-living crisis.
Voluntary Class 3 NICs is £15.85 per week or £824.20 per year. This one-off lump sum payment can add up to 1/35 of the full rate to your eventual state pension – £5.29 a week or around £275 a year. After four years, it pays for itself. Anyone plugging ten missing years of NICs would need to stump up £8,242 (ten lots of £824.20), but their annual state pension boost would be around £2,750.
2) Lower earners and younger workers to be auto-enrolled into a pension
In a ‘landmark’ day for pensions policy, the DWP agreed it would back legislation to expand auto-enrolment, first proposed back in 2017 but which has gathered dust ever since.
In an update last week, the DWP confirmed it would back a Private Members Bill which would grant two extensions to auto-enrolment:
- Abolishing the lower earnings limit for contributions
- Reducing the age from 22 to 18 years old.
Currently, in order to be eligible for auto-enrolment, workers aged between 22 and state pension age need to earn at least £10,000 per year from a single job (the earnings trigger).
But there’s another limit which employers need to be mindful of – the lower earnings limit for contributions. Someone earning £6,240 or under is entitled to join a pension scheme but the employer does not have to contribute. An employee earning between £6,240 and £10,000 (the pensionable income) is also entitled to opt-in to the auto-enrolment scheme and the employer must contribute (3% while the employee contributes 5%).
According to Kate Smith, head of pensions at Aegon, by removing the lower earnings limit altogether so that contributions are based on the first pound of earning rather than a band above £6,240 will mean contributions from both individuals and employers increase.
Smith gave this example: Employees pay 5%, so this equates to £312 a year, but after tax relief, this is just over £20 a month. But with employer contributions, this will be boosted to £499 a year extra.
However, she said: “To avoid an overnight change, it will be important to introduce this gradually over a number of years, particularly as we emerge from the current cost-of-living crisis. Otherwise, someone earning £12,480 would see their contributions double overnight.”
By reducing the age limit, it means more younger workers will be brought into auto-enrolment too.
3) State pension age could rise sooner than expected
Earlier this year, reports suggested the Government was looking at bringing forward the proposed increase in the state pension age to 68 by the years 2037 to 2039, instead of by 2044 to 2046.
This was supposedly considered as a means to deal with an aging population and falling birth rates, commentators hinted.
And they also said that based on policy, the Government needs to give 10 years’ notice of any changes to the state pension age, which means that the earliest it could be accelerated is to 2033 as many expect an announcement in next week’s Spring Budget.
The change from 2044-2046 to 2037-2039 is expected to impact around 5.8 million people, who would see the age at which they claim their state pension pushed back a year, according to retirement specialist Just Group.
But by accelerating it further to the mid-30s, a further 2.7 million people – around 910,000 people every year – would be impacted, taking the total number of people affected to 8.5 million.
Stephen Lowe, group communications director at Just Group, said: “Increasing the state pension age forces a radical shift in people’s retirement planning.
“It means people face a fundamental choice of financing an extra year before they receive their state pension, which is the bedrock of retirement income for many people, or working longer.
“Even though the increase to 2037-39 has been mooted for a long time, there are still likely to be millions of people unaware that the increase is likely. While that date may still seem a long way off for many, some people will have limited time to adjust their plans and cut their cloth accordingly.”