The State Pension
The problem with the State Pension
Qualifying for the State Pension
Your personal State Pension Forecast
Been Travelling the world dude?
Can you add your State pension to a personal pension?
OR an Occupational Pension plan?
State Pension for those retiring overseas
SERPS (the State Earnings Related Pension)
State Pension if you’re Working Within the European Union
How much is The State Pension
The Basic State Retirement Pension for a single person is £95.25 a week for a single person and £152.30 for a couple in 2009/10. Whether you get this can depend on how many national insurance contribution years you have completed.
The basic pension is lower than the income support threshold, so if they have no other income, state pensioners can top up with income support. This comes in the form of a means-tested Pension Credit which brings the weekly amount up to £130 for a single person and £198.45 for a couple.
That’s it.
Some will get additional sums such as Disability Living Allowance or other categories of state benefit which depend on individual circumstances. (Ask your local DSS benefits office).
Note: A large percentage of pensioners do not claim for all the benefits they could be eligible for. If you know a pensioner you could make enquiries on their behalf to their local DSS office.
And you find you get more from the State Second Pension.
But taken together, the state pension package represents a substantial fall off in income and living standards for most people.
If that’s good enough for you, excellent.
If not you’ll need to start an occupational pension, personal pension or Stakeholder pension to supplement your future State pension.
The problem with the State Pension
The main problem is that thanks to improved social and medical conditions people are now living longer. But at the same time population growth is slowing so there are fewer younger people entering the job market.
This means fewer taxes are raised, so there’s less money to pay for state pensioners.
In 1949 there were approx. 4 million pensioners in the UK. There are now 10.5 million and they live longer in retirement. This is expected to rise to 12.5 million by 2025 and to 14 million by 2050. While there are now 4.5 working people to every pensioner, by 2025 there will only be 3.5
This hits all pensions but the state pension hardest of all as the only way to improve it is to raise taxes and that’s – to put it mildly – unpopular.
Meanwhile all the time the actual value of the state pension is getting less and less compared with the rising wealth of the average person.
Since Margaret Thatcher changed the rules in the 1980s, pensions go up with prices, not with earnings which outstrip prices. If pensions had risen in line with earnings, the basic state pension would now be around £130 a week – still not much but a whole load better than what a retired person now gets.
However the UK government has introduced a major pensions reform. See how this will affect the UK state pension
Qualifying for the State Pension
You become eligible for the basic state pension – and benefits from the Second State Pension – when you are 60 for women and 65 for men (the age of the woman will gradually rise to 65 between the years 2010 and 2020).
Contrary to popular belief the State pension is not an automatic right. Getting one at all, or how much you get, depends on your National Insurance (NI) contributions record i.e. how many you have made.
New rules are more generous. Before you had to notch up 49 years for a man and 44 for a woman. This assumed everyone started working at 16.
Now it’s only 30 years which allows for a few gaps.
If you have not made enough NI contributions you may be able to make voluntary contributions. Ask your local DSS office about these but remember the DSS may get it wrong so double check whatever they tell you.
In certain circumstances more basic pension can be claimed than your NI contributions record might imply. Two examples are:
- Home responsibilities protection is for people who look after a sick or disabled person for at least 35 hours a week, or receive child benefit for a child under 16 or still in full time education. Your local DSS office is the best place to ask about this initially.
- Unemployed or sick: NI contributions credits will be made for you if you’re off work so long as you’re receiving Jobseekers Allowance or sickness benefit.
DSS State Pension Forecast Service
The DSS provides a pension-forecast service whereby it will predict what state benefits you are in line to receive, including the State Second Pension (formerly known as SERPS), based on your existing NI contributions.
Call 0845 300 0168. If you have your National Insurance number ready, they’ll fill out a form for you over the phone in a couple of minutes. But it does then take up to 40 days to receive the forecast through the post.
Been Travelling the world dude?
We can confirm that in recognition of your services to the backpacking industry special consideration has been allowed by the DSS for you to receive special NI contribution credits.
Nyaaah. Only joking me old space cadet. (Your parents were right you slacker. You will pay).
But, seriously, if you’ve missed a few years for whatever reason you might be able to make back payments. See Voluntary NI Contributions / Class 3 and / or call your local DSS office.
Part time workers
If your earnings were less than the “lower earnings limit” (at the time of writing this is £4,940 a year or £95 a week), you may not be in line for a full pension. You might qualify for Home responsibilities protection. Or maybe you could consider making Class 3 Voluntary NI Contributions.
Don’t forget that if your income is really low and you have little in the way of savings, you might be better ignoring all NI top-ups and going for a means-tested Pension Credit benefit which can also include payment of your rent or mortgage interest.
Increasing your State pension
Voluntary NI Contributions / Class 3
To improve your State Pension prospects you can pay Class 3 Voluntary NI Contributions. Only those years with completely paid up NI contributions count towards your state pension. So if you had paid most but not all of a year’s NI contributions it seems a good idea to make up the shortfall.
Not necessarily though. If you’ve no chance of making even 9 or 10 years of full NI contributions then why bother?
In this case you need a different pension or savings plan e.g. personal pensions or a stakeholder etc. If you can’t afford anything else look to the Minimum income guarantee to sort you out and maybe check Alternative ways of Saving.
The DSS can tell you exactly how many Class 3 NI contributions you would have to make. Call them and / or see DSS leaflets CA07 and CA08.
Note: At the time of writing you can only back date Class 3 NI contributions for six years.
The DSS may get it wrong
While the DSS are the first people to ask, in the first instance, it is important to realise that because the system is so complex they may not get it right. In fact if you are retiring they may even miscalculate your entitlement (If this happens you can of course appeal but would need to know that they have made a mistake in the first place).
Sources of independent advice are your local Citizens Advice Bureau, your trade union or you could try the TUC (Tel 020 7636 4030).
Is the State Pension taxed?
Yes. (Another great myth exploded). But usually the State pension is below the tax threshold. It depends on your personal allowance but basically the normal State Pension of around £4,950 pa, for a single person, is unlikely to be taxed if that is all the income you have.
This is because this level is below the income tax personal allowance. Once you get to 65, it comes with an extra age related allowance. This means someone who qualifies can earn around £9,500 before paying any income tax.
Minimum income guarantee
This minimum income guarantee tops up your earnings with extra state money. This is “means tested” (ie you have to prove that you don’t have over a certain level of savings – which is £6,000 at the time of writing).
The minimum income guarantee is £130 a week for a single pensioner and £198.45 for a married pensioner couple. It rises a little for pensioners over the age of 80.
The minimum income guarantee is supposed to rise in line with National Average Earnings as opposed to the Retail Price Index – which the basic state pension is tied to – the former tends to rise faster.
Check with your local DSS office for the latest figure. Or look on the Direct.gov.uk website.
Can you add your State pension to a personal pension?
Your entitlement to a basic State pension is not affected by having a personal pensions or by occupational pensions.
They will be taxed together. Suppose your total state entitlement including the second pension is £6,000 a year and you have £4,000 from an occupational pension and £3,000 from a personal pension. You now have a total taxable income of £13,000. The first £9,500 or so is tax free so you end up paying 20% on the £3,500 remaining – about £14 a week.
Good news spot
Once you reach the state pension age, you don’t pay National Insurance anymore even if you carry on working. For someone on around £20,000, that’s a saving of nearly £40 a week. And you get free local public transport including a free bus pass (in England) with local trains and tubes for London residents.
Can you add your State pension to an Occupational Pension plan
Your entitlement to a basic State pension is not affected by having an Occupational Pension.
They will be taxed together e.g. Your state pension of approx £3,510 added to your Occupational Pension plan of, say, £10,000 = £13,900 gross pa. This would be taxed after your usual personal allowance.
State Pension for those retiring overseas
You can still get your state pension if you move to a sunnier place after retirement. But beware that it will be frozen at the rate when you left dear old Blighty unless you move to a country with an agreement with the UK.
Perhaps surprisingly, the list of “good countries” includes the former Yugoslavia, the European Union and the United States but not Australia, New Zealand, South Africa or Canada. Oh well. Suppose the blood given for King and country by the Aussies, Kiwis and co, on all those sad battlefields, has been forgotten about.
The State Second Pension (S2P)
Formerly known as SERPS, S2P is a top up to your state pension to reflect your earnings over your working life. It is an addition to your State Pension.. It used to be calculated on 25% of your salary during its best years. But this level is gradually being lowered to 20%.
What is Serps? It is the state earnings related pension scheme. This provides a layer of retirement pay on top of the basic pension. It is related to earnings over a working life… Read more
The self employed are excluded from SERPS
Everyone else who pays NI contributions is – “a member of” SERPS unless they’ve chosen to “contract out”.
Contracting out of SERPS is when you decide to take out a personal pensions or become a member of an Occupational Pension plan and your NI contributions are paid into that pension instead.
SERPS “starts saving for you” from day one – unlike the State Pension where you have to make NI contributions for 10 years before qualifying for 26% etc. (see Table 5).
There are now major changes to State Second Pension planned
History of the British State Pension
During the 18th century the poor relied on the Elizabethan “poor laws”. The parishes had to support the poor and sick but not the “work shy”. However the conditions of the notorious poorhouses and a growing social awareness, thanks to writers like Charles Dickens, meant that by the end of the 19th century, state intervention had become a vote winner.
The “Lloyd George Pension” of 1908 was a “means tested” flat rate five shillings paid to the poor aged seventy plus.
In 1925 state pensions were started for those 65 years plus.
The Beveridge report unified all the existing social welfare systems into what we now know as the welfare state – which was introduced by the Labour government of 1945.
In 1978 SERPS was introduced. The idea was to give people a pension income of around half the average earnings.
The Pensions Acts of 1995 equalised the pension age for men and women at 65 which will be achieved between 2010 and 2020.
Bismarck was apparently the first European leader to introduce a state pension – in Germany, in the 19th Century.
State Pension if you’re Working Within the European Union
There is now a pan-European state pension system.
It includes a multi lateral agreement on social security. If you work in another EU State for longer than a year you have to start paying social security there.
Depending on the individual country’s requirements you would have to pay different levels in order to qualify for pension benefits but when you return to the UK you can then claim the benefits you would have received in the other country.
The advantage here is that almost everywhere else in Europe the state pension schemes are much better than the UK’s.
Check with your local DSS office for further details.