Last week’s Budget contained announcements that the introduction of the new flat rate State Pension and the cap on social care costs, will be brought forward by a year to 2016.
So far so good, but how will these changes affect you?
Flat rate State Pension
It had previously been announced, that the new flat rate State Pension would be introduced for people retiring after 6th April 2017 and who had paid National Insurance contributions for at least 35 years during their working life.
However, this will now be brought forward by a year, allowing around 400,000 more people to benefit from the new flat rate worth £144 per week in today’s money.
The big winners of the change will be 85,000 women, born between April and July 1953, who would have been worse off under the original plans and excluded from the new flat rate State Pension, having already seen their State Pension age rise.
All other details of the scheme, announced in January, will remain unchanged.
The Chancellor said that the change would “help the low paid, the self-employed and millions of women most of all”, although he accepted it will leave members of final salary or defined benefit pensions paying higher National Insurance. This is because most of these types of pensions were ‘contracted out’, which resulted in lower National Insurance contributions for employees. Once ‘contracting out’ comes to an end, National Insurance contributions will rise by 1.4% for approximately 6.4 million people, resulting in a windfall of around £5.5 million for the Treasury, which will partly be used to fund the £2,000 employer National Insurance break announced in the Budget.
Whilst many employees in previously ‘contracted out’ pensions will pay higher National Insurance contributions, the compensation will be a higher State Pension in retirement. According to government figures, a 40 year old will contribute an extra £6,000 in National Insurance during the rest of his or her working life, but be entitled to an additional £24,000 in State Pension payments when they retire.
Commenting on the news, Minister for Pensions, Steve Webb, said: “Our reforms will create a simple, decent State Pension, which is set above the basic means test sooner. The new State Pension will be fairer to the low-paid, the self-employed and carers and make it easier for people to understand what they will get from the State when they reach State Pension age.”
Webb continued: “By introducing single tier in 2016, every woman affected by the changes we have made to the State Pension age in this parliament will also now have access to the new State Pension.”
Social care cap also brought forward
It was also announced that the social care cap will be brought forward by a year.
The social care cap will now be introduced from 2016, with the maximum amount which the elderly can be asked to pay for their care being reduced from £75,000 to £72,000.
The cap only applies to the cost of care and not that associated with accommodation, which will still have to be met by the individual.
Are you affected by these changes?
If you are approaching retirement, or have already finished work, and are worried about how these changes affect you, feel free to get in touch with our team of Independent Financial Advisers who are experienced in developing retirement income strategies for clients the length and breadth of the UK.