How state pensions build up
The state pensions system is paid for through the National Insurance fund.
This is supported by payments from employers and employees, and can potentially be topped up through general taxation. Your record for entitlement to state pension is based on your record of National Insurance (NI) contributions and/or credits.
For employed individuals, NI contributions are paid at the following rates (based on 2015/16 tax year figures):
- Employee – 12% on earnings between the Primary Threshold (£672pm) and Upper Earnings Limit (£3,532pm). 2% on earnings above the Upper Earnings Limit. If contracted out, there is a rebate of 1.4% of earnings between the Lower Earnings Limit (£486pm) and the Upper Accruals Point (£3,337pm).
- Employer – 13.8% on earnings above the Secondary Threshold (£676pm). If contracted out, there is a rebate of 3.4% of earnings between Lower Earnings Limit (£486pm) and the Upper Accruals Point (£3,337pm).
Members: our Excel calculator will help you estimate National Insurance payments made by you and your employer.
If you are currently contracted out (because you are a member of a defined benefit workplace scheme), this provision will cease in April 2016, meaning that employees and employers will revert to paying the full rate of National Insurance. Employers might seek to reduce the value of defined benefit workplace schemes to offset their increased NI costs, and indeed the government has given them exceptional powers to do so. Members can find more information about this in our briefing about the abolition of national insurance rebates from April 2016.
If an individual earns above the Lower Earnings Limit of £486pm, but not at the Primary Threshold level (£672pm) required to pay National Insurance, they still build up benefits as if they had paid.
Different arrangements apply to the self-employed, who can make different forms of National Insurance. Individuals who are neither paid employees nor self-employed may be entitled to get National Insurance credits if they are:
- unemployed and claiming Jobseekers Allowance (credits automatically given)
- ill and/or disabled (recipients of Universal Credit or ESA get credits automatically)
- on maternity, paternity or adoption leave (recipients of Statutory Maternity, Paternity or Adoption Pay need to apply for credits)
- carers (recipients of Child Benefit and Carer’s Allowance get credits automatically)
The amount of state pension you get depends on your record of NI contributions/credits built up over your working lifetime (between age 16 and state pension age).
If you fall short, you can top up your record by paying Class 3 NI contributions. Further details can be seen in Prospect’s downloadable briefing .
Anyone reaching state pension age before 6 April 2016 can also top up their state pension by paying voluntary Class 3A contributions – for more information download Prospect’s briefing.