State Pensions – A quick refresher

Cartoon. Wrong queue Mr Paterson this is pensions - you're only 83

Where it all began

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 – I kid you not), 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.   

You may feel that things have come a long way since then but those who are relying mainly on the State to provide for them in retirement will, as ever, be very disappointed with this important phase in their lives. To avoid this 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.  
To give you a choice of reading for those who are not interested in State Pensions here is a link to an excellent article looking at understanding risk in portfolios and how to manage uncertainty by Guy Myles, Chief Investment Officer and Chief Executive, Flying Colours Finance Ltd  

The State Pension Age

I am sure you will have noticed that the State Pension Age has been increasing in recent years. This is due to a combination of the fact that average life expectancy is increasing and that a shrinking workforce has to support a fast growing number of retirees.  

Women have been particularly disadvantaged by having their State Pension Age brought into line with that of men and in just a few years losing a five year advantage. For men and women, the state Pension Age is currently 66. It is then scheduled to rise to 67 between 2026 and 2028 and from 67 to 68 between 2044 and 2046. However legislation provides for a review at least once every five years so I would expect to see 70 the new norm eventually.  

You do not have to stop working when you reach State Pension Age but you’ll no longer have to pay National Insurance. 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.  

In 2010 a 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. This is currently under threat as being too generous in the current economic climate.  

The Basic State Pension – If widowed or divorced

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

A divorcee can use their former spouse or civil partner’s qualifying years of National Insurance contributions to increase their Basic State Pension. However this is something that has to be claimed and recent analysis shows that around 100,000 divorced women are not claiming this. You lose these rights if you remarry or enter into another civil partnership.  

The Basic State Pension – Can be deferred

If you want to defer your Basic State Pension, you do not have to do anything. Your Basic State Pension will automatically be deferred until you claim it. Your State Pension increases by the equivalent of 1% for every 5 weeks you defer. This works out as 10.4% for every 52 weeks. The extra amount is paid with your regular State Pension payment.

You can usually take your extra State Pension as either higher weekly payments or a one-off lump sum. If you take the lump sum and you are a basic rate tax payer you will not have to pay higher rate tax on it even if it pushed you above the basic rate tax band.  

Deferring the Basic State Pension has risks, however. If you were to die whilst deferring it the amount you have deferred will be lost on your death and only the increases due on the deferred State Pension will be payable to your family. To avoid this risk you could simply take the State Pension and reinvest it into a Personal Pension during the period you don’t need it to live on. Any tax due on the State Pension would be reclaimed when you reinvested it.  

The New State Pension

If you will have 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 New 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) and to get this you will need 35 qualifying years.  The bad news is that if you achieve more than 35 years which is easily possible you will continue to pay the full National Insurance contributions but will get no extra State Pension. You will not get your New State Pension automatically – you have to claim it.  You should get a letter four months before you reach State Pension Age, telling you what to do.  

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.  

State Pension Statement

If you are age 50 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 chance to make these up so you get a full State pension.  

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 the tax.   

Earnings related additions to the State Pension

There have been a number of such earnings related additions to the State Pension.  

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 2002 State Second Pension Scheme replaced SERPS.  

An additional pension may be transferable on death

If you were born on or after 6 October 1945 (men) or 6 July 1950 (women) and your spouse dies you may be able to inherit 50 per cent of any SERPS pension and State Pension top-up they were receiving. For earlier ages the percentage increases.  

Overseas aspects

If you have lived outside the UK for part of your working life you may still be entitled to a State Pension based on the number of years of your working life in the UK.   

If you lived in a country in the EEC, or any country whose social security system has a reciprocal agreement with the UK, then any social security payments made there, or residence there, may count towards the requirements for the UK State Pension.   

It is also possible to have a State Pension paid overseas if you retire abroad and in certain countries you can also receive the annual increase. 

Arthur Childs

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