Pensions – overview of the new rules

Pensions: new rules overview

This April pensions are changing. More people will qualify for the full basic state pension and both men and women will benefit from only having to work or act as carer for 30 years to claim it. To help you get to grips with the new rules and understand your options, we’ve put together a helpful pensions overview.

Your options

There are three types of pensions you should consider: state pensions, personal pensions and company pensions.

1. State pensions

Basic state pension

You’ll be entitled to a state pension as soon as you retire and it will provide you with a regular income for the rest of your life. The amount you’ll receive depends how many qualifying years of National Insurance you’ve built up. Keep in mind a full basic state pension for a single person is currently £95.25 per week, so it won’t cover much more than life’s essentials.

As of April 6, you’re entitled to claim a basic state pension if:

  • you’re over 65 (this will increase to 68 between 2024 and 2046);
  • you have 30 qualifying tax years (currently £4,940 or more for employees or £5,075 or more for the self-employed).

Additional state pension

On top of a basic state pension, you can build up an additional state pension using the State Second Pension (S2P) programme which replaced the State Earnings-Related Pension Scheme (SERPS). The new way is more generous for low and moderate earners, certain carers and those with disabilities than the preceding scheme.

The main difference between the basic state pension and the additional state pension is that the basic state pension is a flat rate while S2P is earnings related – so the more you earn, the bigger the additional state pension will be.

You may be entitled to an additional state pension even if you don’t get a basic state pension. As of April 6, you can build up an additional state pension if you are:

  • Employed and earning over £4,940 (from any one job)
  • Looking after children under 12 years old and claiming child benefit
  • Caring for a sick or disabled person for more than 20 hours a week and claiming Carer’s Credit
  • A registered foster carer and claiming carer’s credit
  • Receiving certain other benefits due to illness or disability

If you’ve signed up for a company pension plan you may have agreed to opt-out of the additional state pension.

Pension credit

In some instances you may be able to get pension credit, an income-related benefit made up of guarantee credit and/or savings credit.

Guarantee credit is available if you’re over 60. It guarantees a minimum income by topping up your weekly income (currently £130 if you are single or £198.45 if you have a partner).

Savings Credit offers extra money for those over 65 who have made some provisions towards their retirement – savings or a second pension, for instance. Currently you can expect at least £20.40 a week if you are single and £27.03 a week if you have a partner.

2. Personal pensions

These are offered by banks, building societies and life insurance companies who will invest your savings on your behalf. There’s no cap on what you can put in but you’ll only get tax relief for sums up to the annual allowance (£215,000), as with all pensions.

3. Company pensions

If you work for an organisation that offers a pension scheme, you’re almost certainly better off joining than going it alone. In addition to the money you pay in, your employer will usually contribute money on top and there may be extra benefits such as free life insurance.

Money may be paid into a workplace pension from:

  • Both your salary and your employer
  • Your salary only
  • Your employer only

If a company has five or more employees, it must provide access to a pension scheme. This scheme could be:

  • Final salary – now rare as they’re expensive to run, these give a guaranteed pension level based on a percentage of your final salary. The sum will depend on how long you’ve worked for the company but it is typically between a half and a third of your salary.
  • Money purchase – employees pay money into a retirement fund which is invested; in the stock market, for example.  When the employee retires, the fund is used to buy an annuity (a financial product) which provides an income for the rest of that person’s life. The amount of income will depend on how well the fund investment performs and the annuity rates.

Moving jobs

What happens to your pension when you move jobs varies. In general, if you have an occupational pension for less than two years, your contributions will be refunded.

If you’ve lost track of old pensions, you can trace them through the Pensions Tracing Service.

Pension entitlement age

From April, the earliest age you can receive a pension will be 55, although individual schemes may have a higher limit. There are a few exceptions and you will still be able to retire early due to poor health.

Alternatives to pensions

Everyone needs to plan for their retirement, so it’s a good idea to start thinking about pensions and savings as soon as you can.

Pensions aren’t the only way to save money for the future, but it’s worth noting that whatever you invest will be topped up by tax relief (that’s £22 for every £100 a basic rate tax payer puts in). However, there are plenty of alternative options for investments and tax-free saving that can provide for you in your retirement, so consider all the options. A popular choice are Individual Savings Accounts (ISAs). Each year you can pay cash and shares into an ISA, and the money will earn tax-free interest. The money will be accessible, so you’ll have to be disciplined and ensure that you don’t touch the money until you retire.