Changes to the State Pension
The size of the pension you are paid by the Government when you reach the State Pension Age is changing!
If all you want to do is to estimate out how much you will receive from the new ‘flat rate’ State pension then you can use the HMRC State Pensions Amount calculator. However, if you are nearing retirement and are going to base your financial planning on the answer, then you can apply for a State Pension Statement which will use your National Insurance history to give you a much more accurate figure. You can do this in writing or by phone to the Future Pensions Centre on 0345 3000 168. Make sure you have your NI number handy.
Why the Change?
In the words of the Pensions Minister Baroness Altmann, “The changes are being made to reform the “mind-blowingly complicated” state pension system into something that, over time, will be clearer and fairer for everybody”. The key phrase in her comment is ‘over time’ because, initially at least, well over half of new pensioners between April 2016 and April 2020 will get a state pension that’s less than the new state pension. Others will get more. The reason for this is that the transitional arrangements have to take account of an individual’s past employment history – specifically, the number of years of National Insurance (NI) contributions they have paid in the past, and whether or not they ‘contracted out’ of the State Earnings Related Pension Scheme (Serps) which became the State Second Pension (S2P) from 2002.
To receive the full £151.25 a week (£7,865 a year) from 6 April 2016 you will need to have met the following criteria:
- A total of 35 years of National Insurance contributions. It is estimated that around 20% of people, many of them women, won’t reach that magic number. For every year less than 35 for which you have paid full NI contributions, your pension will be reduced by 1/35th of the amount, or around £4 a week. Those with fewer than ten years of contributions will get no state pension.
- You have always paid the higher National Insurance contributions that count towards the State Earnings Related Pension Scheme (Serps) or State Second Pension (S2P). This is far from straightforward, as between 1978 and 2012 it was possible to ‘contract out’ of SERPS or S2P. In return for reducing the size of your employee NI contributions during your working life you received extra pension from your occupational/final salary pension scheme.So, although you may have been paying NI contributions for 35 years, for at least some of those years you may have not been paying the higher level required to qualify for the new ‘flat rate’ pension. If you think this may apply to you then you should consider requesting a full State Pension Statement (see above on how to do this).
The ‘Contracting Out’ Rules
In addition to the basic state pension, the state provides a second-tier top-up pension, based on how much you earn. Introduced in 1978 and originally called the State Earnings Related Pension Scheme (SERPS), it became State Second Pension (S2P) in 2002.
Before the 2012 rule changes, employees were allowed to ‘contract out’ of this additional pension. In exchange for lower National Insurance contributions they gave up part or all of it and received extra pension from their occupational scheme or personal/stakeholder pension instead.
Until 1988 people could only contract out if they were members of a defined benefit (DB)/final salary occupational pension scheme – in most cases, if you had a final salary pension you were automatically contracted out. In 1988 however, the government extended this to defined contribution (DC) or money purchase occupational schemes and personal pensions. It gave incentives to encourage people to leave the state earnings-related pension scheme (SERPS). For the first five years of the scheme, the government paid in an extra 2% of your earnings into your personal pension. By 1992 over 5 million people had left SERPS for a personal pension.
The method of working out the pension payment for those who have “contracted out” are complex. First, the DWP estimates a theoretical amount of extra employer’s or personal pension you get from being contracted out. That amount is deducted from the flat-rate pension, often leaving your entitlement under the new state pension well below the basic state pension payable under the present scheme. Not surprsingly this is causing a significant degree of consternation to those affected, but the Government takes the view that if you were ‘contracted out’ you will already have received substantial financial benefits during your working life and therfore an adjustment should be made when you retire.
What if I don’t pay NI or don’t work at all?
As NI contributions are not payable until weekly earnings reach £155 it may be that you haven’t paid any NI subscriptions. Even if you don’t do paid work at all, you may be able to get contributions credited. It should happen automatically, but in some circumstances these credits must be claimed.
Credits are given to:
- People who get working tax credits.
- Those getting Employment and Support Allowance or Maternity Allowance, as well as those on statutory sick pay or maternity/ paternity/adoption pay.
- Parents who receive child benefit for a child under 12. In some cases these credits can be passed to other family members who care for the child.
- People who care for another person for at least 20 hours a week. The person you care for may receive a disability benefit butif they do not, when you fill in the ‘Care Certificate’ part of the application form, get a health or social care professional to sign it. Before 2010, parents and carers got something called “home responsibilities protection” instead of credits. These years should now have been converted into credits. If you don’t think you had the protection, you may still be able to apply in certain circumstances.
- People who get Jobseeker’s Allowance or are looking for work.
There are many other circumstances when contributions can be credited – including jury service, education and training, wrongful imprisonment, and so on. If you have been unable to work for a good reason, it is worth checking if you are entitled to a credit. But do it soon as there are time limits for claiming it. Employees who earn at least £112 a week will get a credit, even though their wages are below the NI threshold of £155. If you’re self-employed and your profits are less than £5,965 you don’t have to pay contributions.
But it may be worth doing so. These voluntary contributions – called class 2 – only cost £2.80 a week but can boost your pension by far more if you are short of the 35 years you need. Gaps in your NI record may be filled by paying class 3 contributions, which cost £14.10 a week. But there are strict time limits by which to do this. You can check your National Insurance record and find out whether you can boost your State Pension on the Gov.uk site. The website also has a lot of other useful information about National Insurance.
To get the new pension, you must be a woman born on or after 6 April 1953 or a man born on or after 6 April 1951. Many people in these age groups have gone online to get a pension statement from the Department for Work and Pensions to find out what their pension will be. But many are scratching their heads at what the figures mean. Although it has been called “flatrate”, the new state pension will be anything but. It is expected to be fixed at £151.25 a week (£7,865 a year). But the exact level will not be announced until the autumn and it may be different from that.
Gov.uk – the Government’s own source of information on the new State Pension and the changes that are taking place. Comprehensive website and jumping off point for more detailed information, but requires lots of clicking to find the bite-size chunks of information you want.
thisismoney.co.uk article on the new State Pension Age – useful overview with tables showing the changes to women’s SPA.
The Pensions Advisory Service page on the new State Pension also has links to lots of other useful Pensions information
The Money Advice Service (MAS) overview of the changes to the State pension. The Money Advice Service is the Government’s site for free and impartial money advice
Financial Times article on why women have been hit particularly hard by the move to a ‘flat rate’ State pension
Excellent Telegraph article on the confusion surrounding the ‘top-up’ rules if your pension statement shows you have NI gaps or were contracted out.