The full flat rate State Pension comes into effect in April 2016, and is intended to improve fairness in the system to ensure that those who haven't built up suitable National Insurance contributions – such as women and the self-employed – aren't disadvantaged.
However, there's been much speculation about its calculation methods, and there are fears that not everyone will qualify for the full amount. In fact, research from Prudential reveals that almost a fifth of those surveyed don't think they'll receive it, with the reforms potentially failing to benefit a large number of future pensioners.
The figures show that 18% of those surveyed who are due to retire after 6 April 2016 don't think they'll qualify for the full flat rate of £155/week. It's an even bigger concern for women, 21% of whom think they'll miss out compared with 14% of men, suggesting that women think they're less likely to have made the equivalent of 35 years in National Insurance contributions needed to qualify.
The biggest reason behind the belief that they'll miss out is taking career breaks to raise children, with 49% of those surveyed thinking that this will reduce their eligibility. However, a further 20% think they'll miss the target because of long-term illness, with only 67% of respondents expecting to have worked for at least 35 years before they retire.
There's also widespread misunderstanding surrounding the reforms, suggesting that work still needs to be done to improve communication with those approaching retirement. The survey found that 27% of those aged 55+ were unaware of the State Pension reforms, while of those who had heard of it, the majority didn't know how much it was worth. On average, respondents thought it would be £125 a week, while a particularly optimistic 11% thought it would be £170/week.
There's also some evidence that people are unaware of the possibility of topping up their NI contributions. Those who have failed to accrue the necessary 35 years in work can "buy" additional years in voluntary contributions, or they could be credited if they received certain benefits. However, just 14% of those who don't think they'll reach the 35-year milestone will make voluntary contributions, meaning they could miss out unnecessarily.
Tim Fassam, pensions policy expert at Prudential, commented on the findings: "The launch of the flat rate State Pension in April 2016 is designed, in part, to make it easier for people to understand how much they will receive from the State, in turn enabling them to better plan for their retirements.
"But inevitably, due to the changes to the rules on eligibility, there will still be differences in what people receive. It is therefore important for everyone to obtain all the relevant information so that they can make an informed decision, if they need to make up additional qualifying years through working longer or making voluntary contributions."
If you don't think you'll qualify for the full state pension, you may want to consider making those voluntary contributions to ensure your eligibility. However, as Tim Fassam adds, "people should not rely on the State Pension alone. Saving as much as possible as early as possible in your working life, and seeking professional financial advice in the run-up to retirement, will help to ensure that you are best placed to make the most of your savings when you're ready to stop working".
That's why you'll want to consider other avenues, too. Saving into a workplace pension should be a top priority, as you'll benefit from employer contributions as well as tax relief, while the addition of compound interest will boost your pot further. Then you should think about other savings vehicles, such as ISAs, which will give you tax-free returns to help build a healthy retirement fund. Putting your eggs in several different baskets will always be the best course of action, as that way, even those that don't qualify for the full state pension will still have a valuable fallback for a comfortable retirement.
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