Entrepreneurs born on or after the 6th of April 1951 (for men) or the 6th of April 1953 (for women) are probably receiving the New State Pension (nSP) and should be aware of the and how it directly impacts their retirement planning.
The nSP, introduced on the 6th of April 2016, affects those reaching the State Pension age from this date onwards. . Anyone who had already reached New State Pension age before this date remained entitled to the previous State Pension, not the new.
Recipients of the old State Pension (referred to as simply the State Pension) receive £156.20 per week if they have made 30 years’ worth of NI contributions, plus additional top-ups from the Additional State Pension according to earning, and whether certain benefits are claimed, or whether you contracted out.
Those who were “contracted out” of the Additional State Pension will have their New State Pension reduced. Contracting out means that you paid lower National Insurance contributions and in return received a lower State Pension.
The New State Pension amount is a single-tier affair and is currently set at £203.85 per week.
The Eligibility Criteria for People Born in 1956 and Later
For entrepreneurs planning their retirement alongside their business ventures, understanding the New State Pension (nSP) is crucial. As of now, entrepreneurs are eligible to start drawing their state pension at age 66. Specifically, if you were born on or after the 6th of April 1956, the nSP applies to you.
It’s essential to note the shift in contribution requirements. While the previous system required entrepreneurs to have 30 years of NI contributions to access the full pension amount, the nSP mandates 35 years. This change could influence financial planning and business exit strategies for many in the entrepreneurial community.
The Benefits of the New System
The thinking behind the introduction of the New State Pension was to simplify the old State Pension, which was quite complicated and elaborate. Also, the old system had a higher means testing mechanism, and it was also discriminatory in terms of gender, with men receiving significantly more than women.
Women born in the 1950s have been particularly affected by the changes in the State Pension age. Many women were expecting to retire at 60 but found out that their retirement age had been pushed back, leading to financial difficulties and unexpected challenges in their retirement planning.
Implications for Business Owners
- Contracting Out: Entrepreneurs who “contracted out” of the Additional State Pension will see a reduction in their nSP. This means you might have paid lower National Insurance contributions in the past in exchange for a lower State Pension.
- Eligibility Criteria: The age to start drawing the pension is currently 66. However, the nSP requires 35 years of NI contributions, a change from the previous 30 years.
- Gender Equity: The nSP aimed to rectify gender disparities. Female entrepreneurs, especially those born in the 1950s, should note that changes in the State Pension age might affect their retirement plans.
- Payment Disparity: While the nSP is advantageous overall, the cut-off point at which entrepreneurs will qualify means that those left of the old system are seriously disadvantaged. In 2016, those on the old system were given £36.25 per week, worse off than those on the nSP, and due to inflationary increases, the gap has widened in 2023 to £47.65.
Strategic Decisions for Entrepreneurs
- Pension Deferral: Entrepreneurs can defer their pension, but the rules have changed. Previously, a lump sum could be requested, but now, deferred pensions are broken down into higher weekly payments. This can impact cash flow and investment decisions. The deferral period is a minimum of 9 weeks, and when received, will be by 1% for each 9-week period. This equates to a little less than 5.8% for each full year of deferral.
- Means-Tested Benefits: Any extra State Pension counts as income including benefits like Council tax reduction, Housing benefit, and Pension credit. This could influence business and personal financial planning.
- Future Challenges: The pension system’s strain might lead to changes in retirement age, affecting when entrepreneurs might choose to retire or sell their business.
Concluding Insights for Business Leaders
Entrepreneurs need 35 years of NI contributions to receive the full nSP amount. If there’s a gap in your contributions, it’s essential to be proactive. The government has extended the deadline to top up missing payments to the 5th of April 2025. A new, user-friendly online checking system will be available by April 2024. For a holistic understanding of how the nSP affects both personal and business finances, consider consulting with financial advisors.