Transitional arrangements

Unless you’re starting out in work now, including as a self-employed person, you will have already paid some NICs (Class 1 if an employee and Class 2 and Class 4 if self-employed). Before 2016, you may have been contracted out from the system, paying a reduced rate of NIC and contributing instead to a personal or workplace pension, for example. Or you may have paid contributions under the scheme for additional state pension (SP2 or SERPs).

So there are transitional arrangements in place to take account of this. Anyone who has already built up an NIC record will have what the government calls a ‘starting amount’. This is the higher of:

• the amount you would have received under the system in place before April 2016, including basic and additional pension; and
• the amount you would get if the new state pension had been in place at the start of your working life.

If you had contracted out from the old state pension scheme, a deduction will be made from your ‘starting amount’. Contracting out ceased from 6 April 2016.

Your ‘starting amount’ may come to more than the level of the new state pension. If it’s above £164.36 a week, it will be protected and paid in addition to the single-tier pension when you reach state pension age.

It makes sense for you to get some estimate of what your own state pension is likely to be. There are calculators on the www.gov.uk web site and you can ask for a Pension Statement.

Working beyond state pension age

You stop paying NICs and you can also consider whether to defer receiving your state pension. By deferring your pension, you can increase your pension by 1 per cent for each nine weeks deferred (under the new system; the old system is different). This equates to an increase of over 5 per cent if you defer for a year.

Individual Savings Accounts

Individual Savings Accounts (ISAs) were introduced by the government to encourage saving and offer many advantages. Any income is tax-free and if you have an ISA that invests in shares the capital gains are free of tax. You don’t need to declare the income or gains in your tax return. You can take your money out at any time. With such largesse, the government puts a limit on the amount you can save in this way and for the 2019–20 tax year it is £20,000.

You can put cash, individual shares, investment trusts, unit trusts or retail bonds (lending money to companies) into an ISA, which you buy online and invest yourself. Or you could buy an ISA from a wide range of financial businesses like building societies, insurance companies or banks. In this case, they will be managed for you but the costs will be a lot higher than if you manage them yourself online.

It’s quite feasible to build up a retirement income from investing each year into an ISA, taking up the full limit or as much of it as you can, reinvesting the income you receive and keeping it within the tax-free environment of the ISA. Note that if you fail to take up your full entitlement of tax-free savings in one tax year, you cannot use that up in the following year – it is lost. So regular yearly savings is the best strategy to make the most of this beneficial savings product.

From April 2017, any adult under 40 is able to open a Lifetime ISA (LISA). Up to £4,000 can be saved each year and savers will receive a 25 per cent bonus from the government on this money. You can save this money until you are over 60 and use it as retirement income (tax-free)

Personal pensions

You can save into a personal pension and the government will give you tax relief on your payments. The amount of tax relief available to you has been shrinking over the last few years. For the 2019–20 tax year, you can save up to £40,000 a year and receive tax relief – so as an extreme example, you could save the whole of your annual earnings as long as that’s less than £40,000. Those earning over £150,000 a year, including pension contributions, has this relief reduced and restricted, dropping by £1 for each £2 that your adjusted income is greater than £150,000, up to a maximum reduction of £30,000. There is also a restriction on the lifetime benefits, which cannot exceed £1,055,000 for 2019–20.

Your pension provider (the company that administers your private pension) claims back tax relief on your behalf at the basic rate (20 per cent) and adds it to your pension pot, generally within two months of your contribution. You get higher rate relief by claiming it back through your tax return.

There are self-invested personal pensions (SIPPs) available or you can buy a personal pension from a financial company, such as an insurance company. With a SIPP, the most sensible option is to run it through an online financial supermarket. This keeps the costs lower, but you are responsible for the success or otherwise of your investments. If you feel daunted by the idea of taking your own investment decisions, an insurance company or other financial company scheme would offer a plan that would mean investing in their own managed funds or funds run by other professional advisers and managers, such as unit trusts. Obviously the costs of these schemes will be higher than for a SIPP managed by you.

Many of the restrictions on accessing your pension pot were swept away in 2015–2016 and there is now much more freedom. For example, at one time you had to buy an annuity (an income provided by an insurance company) and this is no longer compulsory.