Earning more than £31,800 a year? Then your pension entitlement is about to get a lot smaller.
When we retire, we are all entitled to a state pension. Alongside this, most people get a state second pension (S2P) – a weekly bonus payment related to how much they earned and how much tax they paid when they were working.
Up until now anyone earning around £40,000 could have received up to £140 a week extra in retirement from S2P. But that’s changing. By 2030 the government wants S2P to come in at the same amount for everyone, no matter what they earn. So this tax year it has again changed the way your S2P is built up.
Last year’s change meant that no extra pension entitlement was built up on earnings over £40,040. This year’s change means that the entitlement will build up at a rate of 10% on earnings between £31,800 and £40,040. That rate used to be 20%.
This might sound like it isn’t much of a big deal, but it is. If you are currently earning £40,040 or more a year and have 20 years’ work left before retirement, it means that your eventual pension payment will come in at £60 less a week than it once would have. That’s a £3,000 shortfall each year: a most irritating state of affairs, given that you are going to be paying higher national insurance (NI) contributions regardless. NI is going up from 11% to 12% in April 2011.
So what can you do? Get a state pension forecast so that you know how much the government will give you when you retire. You can call 0845-3000 168 for this. But the only thing you can really do is start saving more into your personal pension. To make up that £3,000 shortfall you would need to save at least an extra £44,000, according to James Salmon in the Daily Mail.