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What the new State Pension means to your retirement

There has been a great deal of press coverage in recent months about the future of pensions in the UK. On the heels of the government’s most recent spending review, there is no better time to look to see if you and your loved ones are ready to embrace the next phase of your lives. 

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What the new State Pension means to your retirement

There has been a great deal of press coverage in recent months about the future of pensions in the UK. On the heels of the government’s most recent spending review, there is no better time to look to see if you and your loved ones are ready to embrace the next phase of your lives. 

Soon the Christmas season will be behind us, and in the New Year, many of us will be looking forward to a prosperous 2016. One key to a hopeful future is knowing that your financial situation is safe and secure.

In the UK, the State Pension will be changing on 6 April 2016. Many of the changes are designed to make the system simpler, but you need to be aware of the changeover requirements.

Whether you or someone you know is saving for their retirement, it is important to know and understand the current financial climate. If you are disabled, or in need of mobility services and haven’t investigated the varying costs of home stairlifts, it is best to do your homework early and be prepared.

New Changes to your State Pension

For complete and up-to-date information on the new State Pension, the Government website is your best source. If you currently receive a State Pension, it will not be affected by the new changes. You will be given the opportunity to top-up your pension by as much as £25 per week, either paying the National Insurance (NI) contribution or using the new State Pension Top-Up Scheme.

Depending on which side of 6 April 1951 for men and 6 April 1953 for women you fall on, there may or may not be changes in your future. Those born before those dates will have no change – even if you defer your pension. But for those born after, you will be affected by the new system and rules. The money you have built up already will be converted by the new rules and payments will be made under the new calculation.

One important change in the new pension scheme is that the earnings-related portion for people who are still employed – called the Additional State Pension – is being abolished. Your new State Pension will be based on your National Insurance (NI) record alone and to get the maximum amount in the new State Pension, you must have NI record going back 35 years. To get any level of State Pension, you need to have worked and paid National Insurance for at least 10 years.

Please keep in mind, if you have been “contracted out” of the State Pension programme at any point in your working life, you may find that your weekly pension amount may be reduced.

Preparing for your Retirement

Everyone knows that starting to save as early as possible is one of the best ways to build a retirement portfolio. Easier said than done. If you can see the retirement horizon within the next 10 years, there is still hope. It is never too late to save.

If you are looking to retire a decade from now, firstly, figure out how much money you need to make your plans work. This will tell you how much you need to save. Take into account your State Pension and compare that to your anticipated expenses. In a recent panel of experts who worked with The Telegraph, there were some basic steps suggested:

  • Put money in ultra-safe funds like annuities
  • Buy growth funds and convert to income funds at retirement
  • Review your investments regularly

Some experts also suggest some hopeful retirees may want to open an Individual Savings Account (ISA) to add to their pensions. These types of saving accounts are tax-free, do not lock your assets and money, and are extremely flexible.

If you are nearing retirement in five years or less, it's important to start thinking about how you will secure income for your retirement right now. The best advice is to set up a meeting with a financial adviser to make the best choices.

One option is an income drawdown. This will let you keep your pension pot growing through continual investment, but allows you to withdraw money to live. But be careful about withdrawing too much because you might find yourself running out of money later in retirement. There are options to purchase five-year annuities, but some financial advisers contributing to The Guardian say the time may be too short to guard against expected and normal market fluctuations.

Buying an annuity instead means trading in your entire pension pot in exchange for a guaranteed, regular income. Again, it can be wise to speak to a financial adviser at this point because they can scour the annuities market for the best rate for you, and can advise you on what kind of annuity will be best. Experts suggest sheltering your pension pot from risk in the few years leading up to your retirement and annuity purchase.

Image Credit: Images Money, GotCredit, moodboard (flickr.com)

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