Focus on State Pensions

Homeless man siting outside building in a cardboard box

Those who are relying mainly on State Pensions to provide for them in retirement will, as ever, be very disappointed with this important phase in their lives.

We don’t want you to be in this position and you should seek to build up a combination of occupational pension scheme benefits, private pension benefits, investment income and rental income (if appropriate) to provide the bulk of your income in retirement.  The State pension benefit is then simply a very useful top-up to these.

Background to State Pensions

The 1908 Old Age Pensions Act introduced the first general old age pension as part of the Social Welfare System.  Half a million eligible people over the age of 70 and earning less than 12 shillings per week (60p), received a weekly non-contributory, means-tested pension of between 2 shillings (10p) and 5 shillings (25p) a week.  Married couples received up to 7 shillings and 6 pence (37.5p) from 1 January 1909. 

The 1925 Widows, Orphans and Old Age Contributory Pensions Act added contributory pensions from age 65 to the existing non-contributory scheme.  Those earning below £250 a year (and their employers) had to pay contributions in the five years leading up to age 65 to receive a pension of 50p per week.

The 1946 National Insurance Act introduced a contributory State pension for all.  Initially pensions were £1.30 a week for a single person and £2.10 for a married couple, paid from age 65 for men and 60 for women, effective from 1948.

The 1959 Graduated Pension Scheme required employees (and their employer) to contribute extra National Insurance contributions based on a percentage of their earnings in excess of £9 a week in return for an increased State pension.

The 1975 State Earnings-related Pension Scheme (SERPS) replaced the Graduated Pension Scheme.  The idea was that everyone would receive a SERPS pension of 25 per cent of their earnings above a ‘lower earning limit’ (approximating to the amount of the basic state pension) and an ‘upper earning limit’.

The 1980 Social Security Act removed the link between average earnings and the State Pension. Furthermore, workers with private pensions could opt out of SERPS and pay lower National Insurance contributions.  This turned out to be a financial disaster for the majority of people who did this.

The 1986 Social Security Act reduced the target SERPS pension from 25 per cent to 20 per cent of average earnings between the two earnings limits.

The 1995 Pensions Act aimed at equalising the future pension age of men and women to 65.

The 2002 State Second Pension Scheme replaced SERPS.

In 2010 Triple Lock was introduced which is a system to guarantee that the State Pension rises yearly by the higher of 2.5% or the rate of inflation (as measured by the Consumer Prices Index) or average earnings growth.

State Pension Statement

If you are age 55 or over I would encourage you to obtain a State Pension Statement which you can do at  https://www.gov.uk/check-state-pension.

You can also complete a BR19 application which you will find at https://www.gov.uk/government/publications/application-for-a-state-pension-statement and then send it by post. 

The State Pension Statement will tell you if you have any missing National Insurance contributions and give you the change to make these up so you get a full State pension.

The State Pension Age

The State Pension Age has been increasing in recent years to reflect the fact that average life expectancy is increasing.

Under the Pensions Act 2011, women’s State Pension age increased more quickly to 65 by December 2018.  From December 2018 the State Pension age for both men and women started to increase to reach 66 by October 2020.

The Pensions Act 2014 brought the increase in the State Pension age from 66 to 67 forward by eight years. The State Pension age for men and women will now increase to 67 between 2026 and 2028. The Act also provided for a regular review of the State Pension age, at least once every five years.

Under the Pensions Act 2007 the State Pension age for men and women will increase from 67 to 68 between 2044 and 2046.

There is a simple State Pension Age Calculator at https://www.gov.uk/state-pension-age

The Basic State Pension

You can claim the Basic State Pension if you are a man born before 6 April 1951 or a woman born before 6 April 1953.  If you were born later, you will need to claim the New State Pension instead.

To get the full Basic State Pension you must have paid or been credited with 30 qualifying years of National Insurance contributions or credits.  The most you can currently get is £134.25 per week (2020-21).  If you have fewer than 30 qualifying years you might be able to top up by paying voluntary National Insurance contributions.

If you are not eligible for a Basic State Pension or you are not getting the full amount, you might qualify for a ‘top up’ through your spouse’s or civil partner’s National Insurance contributions.

A widow or widower may be able to increase their Basic State Pension by using their deceased spouse’s qualifying years if they do not already get the full amount.

You can defer your Basic State Pension which will then increase by 1% for every 5 weeks you defer.  The extra amount is paid with your regular State Pension and can be claimed on top of the full Basic State Pension amount.

Divorced couples can use their former spouse or civil partner’s National Insurance contributions to increase their basic State Pension. You lose these rights if you remarry or enter into another civil partnership.

The New State Pension

If you reached State Pension Age on or after 6 April 2016 you will be entitled to the New State Pension. You will usually need at least 10 qualifying years on your National Insurance record to get any State Pension. They do not have to be 10 qualifying years in a row.

The current full New State Pension is £175.20 a week (2020-21).  The actual amount you get depends on your National Insurance record.  You will not get your New State Pension automatically – you have to claim it.  You should get a letter no later than 2 months before you reach State Pension Age, telling you what to do.

You can get more State Pension by adding more qualifying years to your National Insurance record.

Unlike the previous Basic State Pension the New State Pension is based on your own National Insurance record and a widow or widower cannot benefit from their deceased spouse’s National Insurance record.

Taxation

Tax is never deducted from State Pensions when they are paid. 

Instead the amount paid is aggregated with any other income to establish if there is a tax liability.  If there is, then the other income will bear it. 


Links to more information about pensions

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.