The State Pension is changing on April 6th 2016 – and self-employed people, in particular, need to be ready. The changes can mean that a self employed person may get a higher amount of State Pension in the future.

Anyone reaching State Pension age before next April will continue on the current State Pension system.

However, those reaching State Pension age after this date will receive the new State Pension which could provide a different pension amount, particularly if they have paid Class 2 National Insurance contributions for a number of years.

Paying Class 2 National Insurance (NI) contributions is a fact of life for anyone who is self-employed.

With the introduction of the new State Pension, the link between these payments and a more secure future becomes clearer.

Under the current pension system if you were self-employed and have made at least 30 years of Class 2 NI contributions throughout your working life the most you could hope to receive was £115.95 a week (the current top rate of basic state pension in 2015-2016). This is because under the existing rules, self-employed people don’t build up any additional State Pension through the Additional State Pension schemes like State Second Pension (S2P), or its predecessor State Earnings Pension Related Scheme (SERPs).

The new State Pension changes this. It means that Class 2 NI contributions made by self-employed people will be treated in the same way as employees’ contributions.

All Class 2 NI contributions, including those made before April 6th 2016, will count towards the new State Pension. This means that pension worries may not be such a barrier to choosing a life of self-employment.

The value for the new State Pension will be set later on this year, but for illustrative purposes the value given for 2015/16 is £151.25, if you have 35 years of contributions.

Under transitional arrangements, which apply to those who have made NI contributions before 6 April 2016 but not reached State Pension age by then, the new State Pension starting amount is the higher of the amount that an individual would have received under the pre-2016 rules and the amount that they would have received under the post-2016 rules.

For those with class 2 contributions over many years, it is highly likely that they will receive the post-2016 value as their starting amount. In the case of someone with 35 years of Class 2 NI contributions their starting amount would be £115.95 under the pre-2016 rules, and £151.25 under the post-2016 rules. As a result, the higher amount of £151.25 would be their starting amount.

For those with starting amounts lower than the full rate, adding additional qualifying years will increase this weekly amount at a rate of 1/35th of the full amount per year.

For more information on how your State Pension will be calculated in the new scheme, read the factsheet How the new State Pension is Calculated.

If you are over 55 and want to know how much State Pension you’ll get, then apply for a statement now. Visit https://www.gov.uk/state-pension-statement or search www.gov.uk for ‘Get a pension statement’.

This article was produced by the Department for Work and Pensions for IPSE members.

Pensions