The state pension system is going through radical changes as announced by the Government last week.
As well as increasing the state pension age to age 66 from 2020 and age 67 from 2026, it wants to simplify the way benefits are accrued as state pensions today can consist of a total of four parts.
There is the basic pension, currently £107.45 per week, the State Second Pension (S2P), the State Earnings Related Pension Scheme (SERPS) and the graduated pension scheme.
The ability to contract out of S2P is no longer available as from April 2012, further evidence of the intention to simplify the system.
The new flat rate pension is initially set at £140 per week but is expected to reach £150-£155 per week from inflationary rises. It is expected to be paid from 2015/2016 for those retiring after this date and being able to evidence 30 years of national insurance contributions.
For those who have already earned a higher state pension through the earnings related element can realise an additional £175 per week.
For new pensioners there will be no longer an earnings related accrual and therefore an individual’s income could reduce by £1,000 per annum.
All will become clearer in the white paper expected in the next two months.
So once again, the responsibility is passed back to the individual. Although the state pension age is increasing, benefits from a privately funded personal pension can be taken from age 55.
As a rule of thumb you need to save 15 per cent of your income each year to receive 50 per cent of your salary in retirement.
To receive 66 per cent of your wages you need to save 20 per cent.