The new state pension will be with us in a little over three months' time, but despite the fact that so many people rely on this form of income, there's widespread confusion about what the changes actually mean, and who will end up qualifying for the full amount.
However, it isn't only confusion that's causing problems, as in some cases, it's complete lack of awareness: research from Aviva has found that only 65% of respondents were aware that the new flat rate state pension would be launched on 6 April 2016, with 24% being completely unaware that such a change was occurring. This figure rises to 27% among 55-64 year-olds, a particularly worrying finding considering the fact that this is the age group that stands to be affected by the changes soonest.
There's also confusion about who'll be impacted by the change, with 16% of over-75s believing that they'll be entitled to the full flat rate state pension, despite the fact that they'll be too old to qualify (in reality, the full flat-rate state pension has a qualifying age of 65 or less for men and 63 or less for women). A further 26% of those aged 75+ are unsure if they'll qualify, and even among 55-64 year-olds, 42% don't know if they'll be entitled to receive the full payment.
There's clearly a lot still to be done to educate the public on what the changes are, and more specifically, what they could mean for individuals. Happily, the Government has so far issued 500,000 personalised statements to individuals telling them where they stand, but this doesn't appear to have hit home with the majority just yet.
The figures also revealed widespread misunderstanding over equalisation of the state pension age and the fact that the qualifying state pension age is increasing, and perhaps even more worrying was the finding that many people are drastically underestimating the value of the new state pension.
Government data shows that typical pensioner households rely on the state pension for 49% of their weekly income, with 51% coming from other sources. However, Aviva's own analysis shows that many over-55s underestimate the value of the state pension and the level of personal savings that would be needed to provide an equivalent retirement income, which could mean that many get a shock when they enter retirement.
It's been announced that the new full flat-rate state pension will provide no less than £151.25 per week (or £7,865 per year) to those who qualify. Aviva's analysis found that, when asked how much they would need to save to generate this form of retirement income from their personal savings, 30% of over-55s surveyed felt a pension pot of no more than £100,000 would be sufficient, including 15% who thought that a mere £25,000 would suffice.
Unfortunately, they'd be mistaken. Aviva's calculations show an annual income of £7,865 (equivalent to the state pension and essentially the other half of a retiree's typical income) would require a pension pot of £218,000 if the retiree purchased an RPI-linked annuity with it, and only 10% of respondents correctly assumed that they'd need a pension pot in this region to provide such an income.
This further highlights a need for the Government and industry to close the awareness gap, for if people assume they can get an equivalent state pension income from a pension pot of £100,000 or below – and don't take the necessary route to try and build up their pot even more – they could find themselves in financial difficulty in later life.
Clive Bolton, managing director of Retirement Solutions at Aviva UK Life, commented: "It is clear from these findings that the British people remain firm believers that the state pension is good for society and fundamental to their own retirement finances. We welcome the new state pension and the issuing of personalised statements, [but] it is clearly an ongoing challenge to communicate the impact of changes to state provision.
"The state pension should be the foundation on which all other retirement savings are built, [and] it is vital that people take steps to understand their entitlement and consider what actions they can take to supplement this income… Quite simply, the prospects of enjoying financial security in later life are far greater for people with a healthy pot of personal savings and investments to boost their state pension payments."
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