What's the key information you need to know about the UK State Pension? Our Pensions Officer, Stewart Mott, explains
Will you receive a full state pension on retirement?
State Pension reforms in 2016 simplified the UK State Pension by replacing the Basic State Pension, Additional State Pension and Pension Credit with the New State Pension.
The New State Pension is simple in that a full state pension of £164.35 (2018/19) is payable for everyone who reaches 35 years of qualifying National Insurance (NI) contributions by state pension age. There is a pro-rota rate paid for individuals with more than 10 years but less than 35 years of qualifying NI contributions.
However, there are complex transitional arrangements for those who would have received more or less under the old system for their qualifying years before April 2016.
These arrangements are in place to ensure that the reforms are fair and no one is unfairly penalised or benefiting from the changes.
This particularly affects members who have been enrolled in a defined benefit pension scheme with their employer who did not build up an entitlement to the Additional State Pension.
Qualifying National Insurance before April 2016
To understand these transitional arrangements we have to review how the state pension was calculated before the reforms.
The New State Pension replaced the Basic State Pension, the Additional State Pension, originally known as State Earnings Related Pension (SERPS) and Pension Credit.
The Basic State Pension was a flat rate pension payable to everyone who met the National Insurance qualifying years requirement. The current rate of the Basic State Pension was £125.95.
The Additional State Pension, originally known as State Earnings Related Pension, was only payable to those who paid ‘A’ rate NI contributions and had earnings between the lower and upper NI earnings limit.
Members enrolled into defined benefit pension schemes were normally contracted out of the Additional State Pension and paid ‘D’ rate NI contributions.
‘D’ rate NI contributions were at a lower level than ‘A’ rate NI contributions as they were not building up any entitlement to the Additional State Pension.
Members of public sector pension schemes, such as the Civil Service Pension Scheme, were contracted out until its abolition with the introduction of the New State Pension.
There was also the ability for members to contract out of the Additional State Pension with personal pensions until April 2012.
Pension Credit was an income-related benefit that topped up incomes to a minimum level for single applicants or couples.
Calculating the New State Pension
The New State Pension is £164.35 per week for 2018/19. This is higher than the current rate of the Basic State Pension which is £125.95.
Members who were contracted out of the Additional State Pension because of their workplace pension will have a ‘starting amount’ for their state pension entitlement for their NI qualifying years up to April 2016.
Members will accrue entitlement to the New State Pension based on 1/35 of the New State Pension for each full qualifying year of NI up to a maximum level of the New State Pension.
Members who were not contracted out of the Additional State Pension may have accrued a higher entitlement for their qualifying years up to April 2016 than the New State Pension.
This ‘starting amount’ is also protected under the transitional arrangements.
Check your State Pension
Members approaching state pension age are recommended to check their state pension entitlement. You can do this online using the Department for Work and Pensions State Pension Checker.
Voluntary National Insurance contributions
Voluntary National Insurance contributions are called Class 3 contributions.
Members with an entitlement below the full level may be able to boost their state pension by purchasing voluntary NI contributions. These can be paid monthly or in a lump sum by direct debit, bank transfer or by cheque.
The rate of Class 3 contributions is £14.65 a week (for 2018/17). You can find out more on HMRC's website.
While voluntary contributions are for specific years, there is no need to make them in the year in question and they can be paid in arrears.
The only requirement is to purchase them before state pension age.
Pension Officer Neil Walsh has written a blog on voluntary national insurance contributions: Are voluntary National Insurance Contributions for you?
You can also find more information on Royal London’s informative ‘Topping up your State Pension Guide’.
Know your State Pension Age
State pension age is no longer 60 for women and 65 for men. Pension age has been rising for women since April 2010 and will be equalised with the pension age for men by November 2018.
The state pension age of men and women will then increase to 66 by October 2020 and 67 by March 2028. You can check your state pension age using the Department for Work and Pensions State Pension Age Calculator.
Want to know more?
Prospect’s website provides comprehensive information on the State Pension in the Pensions and Retirement section of Help at Work.