State Pension (United Kingdom)

Background

The State Pension is a "contribution-based" benefit, and depends on an individual's National Insurance (NI) contribution history. For someone with the 30 qualifying years (years in which NI contributions were paid), it is payable at a flat rate of £119.30 a week (up to April 2016). 35 years contribution is needed to get the full new state pension from 6 April 2016. A smaller, pro-rata, pension is paid to someone with fewer qualifying years. People who were contracted-out paid lower NI contributions and will receive a lower state pension. An "age addition" of 25p a week is paid to people over 80.

The Basic State Pension is increased in April each year to pensioners living in the UK and in certain overseas countries which have a Social Security Agreement with the UK that includes British pension uprating. Pensioners living in other overseas countries without a current agreement have their pensions frozen at the rate in effect on the date when they left the UK, or on the date when they applied for a pension, whichever is later.

State Pension age

The state pension age (SPA) is presently 65 for men. Under the Pensions Act 1995, the SPA for women is in the process of being increased from 60 to 65. The Pensions Act 2011 will raise the SPA to 66 for both men and women by 6 October 2020. Under the Pensions Act 2007, the SPA for both men and women will be raised to 68 between 2044 and 2046. Under the Pensions Act 2014, the Government brought forward the rise in State Pension age to 67 for both men and women to 6 April 2028. Details are as follows.

Deferral

It is possible to defer claiming a State Pension at SPA. Deferred pensions are increased by 1 per cent for every five weeks that the pension is not claimed (approximately 10.4 per cent a year). From 6 April 2016, the increase in pension arising from deferral will be reduced to approximately 5.8% per year for those who reach pension age on or after that date. Alternatively pensioners who have deferred their pension can claim a lump sum and an unenhanced pension. The lump sum is the amount of pension payments foregone plus interest at 2 per cent a year over the Bank of England base rate.

Calculations

The Basic State Pension is based on the National Insurance record of the individual. Each year that National Insurance was paid is called a qualifying year. For 2012:2013 to be a qualifying year you need to earn at least £5564 if you are an employee, or £5595 if you are self-employed, and have paid (or been credited with) National Insurance contributions based on these earnings. Men born after 5 April 1945 and women born after 5 April 1950 need 30 qualifying years for a full Basic State Pension, with a single qualifying year required to get any State Pension. Men born before 6 April 1945 needed 44 qualifying years for a full Basic State Pension, and women born before 6 April 1950 needed 39 years; to get any State Pension, an individual needed 25 per cent of the qualifying years required for a full pension. Since April 6, 2016, 35 qualifying years are needed to receive the full new state pension. State pension amounts can be reduced if the pensioner was in a contracted-out works pension scheme. Always get a state pension forecast from the official government website.

Individuals with less than a full record of qualifying years, may elect to pay voluntary National Insurance contributions, in order to boost their record for pension purposes.

People in certain circumstances, such as caring for a severely disabled person for more than 20 hours a week or claiming unemployment or sickness benefits, gain National Insurance credits.

The amount of the Basic State Pension that you actually receive is calculated by multiplying the full rate by the number of your qualifying years and dividing by the number of years needed for the full rate.

If you paid NI contributions between April 1961 and April 1975 you would have earned a small Graduated Retirement pension.

If you paid NI contributions between April 1978 and April 2002 you would have earned an additional pension from the State Earnings Related Pension Scheme, although this will be very small if you were "contracted out" of this arrangement. Since April 2002 NI contributions have earned an additional State Second Pension.

Married couples

A wife or husband can claim extra Basic State Pension based on the National Insurance contributions paid by his or her husband or wife (this extra is called a Category B pension).

If a woman has a Category A Basic State Pension of less than 60 per cent of the full Basic State Pension, then when she reaches her State Pension Age, she will have her Basic State Pension topped-up to 60 per cent of her husband's Category A Basic State Pension.

Men, born after 5 April 1945, are able to claim a Category B pension based on their wives' contribution record. Similarly, civil partners who reach State Pension Age on or after 6 April 2010 are able to claim a Category B pension on the same basis.

Top-up pensions

Married women with young children and carers can claim credits of NI contributions.

Pensioners with low incomes can claim Pension Credit.

Pensions Act 2007

A new approach was introduced following the findings of the all-party Pension Commission in 2006 and the white paper Security in retirement: towards a new pension system published in May 2006. The key provisions were:

1. Reduction of the qualifying years for a full Basic State Pension from 44 years for men and 39 years for women to 30 years for both.
2. The Basic State Pension's yearly increase is determined by a rule known as the “triple lock”, it being the greatest of:
   1. the growth in national average earnings;
   2. the growth in retail prices as measured by the Consumer Price Index;
   3. 2.5 per cent.
3. The contribution conditions for Basic State Pension were changed so that it is easier for everyone to build up some entitlement.
4. Replacing Home Responsibility Protection (HRP) with a new system of weekly credits for parents and carers.
5. Raising the State Pension Age for both women and men from 65 to 68 in three stages between 2024 and 2046.
6. Introducing National Insurance credits for parents and carers so that they can build up some entitlement to the Additional State Pension.
7. End of the option to contract out of the Additional State Pension through money-purchase private pensions.

Some modifications to this were made in the Pensions Act 2008.

Future flat-rate state pensions

The Government originally proposed that in April 2017 the Basic and Second State Pensions should both be replaced by a single, flat-rate pension. A Green Paper was issued in April 2011, followed by a White Paper in January 2013. The amount of an individual's flat-rate pension would depend on the number of qualifying years, with 35 qualifying years being needed for the maximum pension and pro-rata amounts for fewer qualifying years, subject to a minimum of about 8 years. Rights already earned to a Second State Pension would not be lost. In the 2013 budget it was announced that introduction of the single tier pension will be brought forward by one year to 6 April 2016.

The new "single tier" State pension will be £144 a week (in 2012-13 terms). Provided they have 35 qualifying years, individuals will actually receive £144 a week, plus a "protected amount" if they have already earned a second State pension greater than £37 a week (which is the difference between the current Basic State Pension and the proposed flat-rate pension), and minus a "rebate-derived amount" if they have paid smaller National Insurance contributions because they were "contracted out" of the Second State Pension Scheme (or its predecessor, the State Earnings Related Pension Scheme).

The new, single-tier State Pension would eventually remove the need for Pension Credit. It is also proposed that various rules regarding marriage, divorce and bereavement would be phased out. This would mean that Category B pensions (see above) would be replaced by Category A pensions for everyone, although any rights to a Category B pension that existed at the implementation date would be preserved.

These changes are now law, they were enacted by the Pensions Act 2014 which received Royal Assent on 14 May 2014

Chancellor Philip Hammond has hinted the state pension will no longer be ring-fenced from spending cuts after 2020 – raising for the first time the prospect of pensioners' benefits being cut as part of the Government’s austerity measures.

Until now, benefits for the elderly have been exempt from reductions and the Chancellor confirmed during his Autumn Statement today that the state pension would continue to rise until at least 2020.

A 2.4 per cent reduction in predicted growth in 2020 means Britain is likely to be faced with a £30 billion budget deficit rather than the £10 billion surplus promised by Mr Hammond's predecessor, George Osborne.