The State Pension Explained
We take it for granted that upon retirement we will receive the United Kingdom’s National State Pension, but how much will your receive and what other considerations should you take into consideration before it kicks in.
Introducing The State Pension
The State Pension is a regular pension payment from the government that most people can claim for when they reach State Pension age.
Not everyone however will receive the same amount and how much you get depends on your National Insurance payment record. The new State Pension provision changed on the 6 April 2016 for those who reached the State Pension age from then onwards. In essence this is men born on or after the 6 April 1951 and women born on or after 6 April 1953. Prompting the new change, the old system was inherently complicated, which made it difficult to assess how much the recipient would receive until they were close to the actual State Pension age.
With the new State Pension however, retirement planning is easier as there are clearer and easier to access guidelines. For many the State Pension is only one part of their retirement income and is often rolled into a wider employer or personal pension portfolio.
How the State Pension Works
The new State Pension is based on people’s National Insurance (NI) records that have been paid over their lifetime. For those with no National Insurance records or contributions prior to April 2016, they will need 35 qualifying years of NI payments in order to receive the full amount of the new State Pension upon State Pension age.
The majority of people however will have made, or have been credited with NI contributions before the 6 April 2016. In this case, when they reach the State Pension age, in most cases, their new State Pension will take into account their NI record prior to April 2016. To be eligible for the new State Pension, you will usually require at least 10 ‘qualifying years’ on your NI payment records in order to receive any State Pension. These can be from before or after 6 April 2016, and they don’t have to be 10 years in a row.
Under the new State Pension system, how much you receive will usually be based upon your own National Insurance record only and not external assets, pensions or funds.
Qualifying Years, NI Credits & Eligibility for the State Pension A qualifying year for the State Pension can be made up through the combining of a number of things including earnings, National Insurance credits, self-employment and voluntary contributions. A qualifying year can be built up if:
- You are employed and earning over £183 a week (2020/21) from one employer and are paying National Insurance contributions
- You are employed and earning between £120 and £183 a week (2020/21) from one employerand are treated as having paid National Insurance contributions
- You are self-employedand paying Class 2 National Insurance contributions (£3.05 a week in 2020/21)
- You make voluntary National Insurance contributions (£15.30 a week in 2020/21)
- You receive National Insurance credits
If you do not earn enough to qualify for the above you can also receive National Insurance credits in a number of unique circumstances, including:
- Caring responsibilities (including receiving Child Benefit for a child under 12)
- You are claiming certain working age benefits such as Working Tax Credit, Jobseeker’s Allowance or Employment and Support Allowance
You may also need to apply for Child Benefit in order to receive your National Insurance credit even if you choose not to receive a payment.
How Much is the New State Pension
The State Pension amount, as mentioned will depend on the level and length of your NI contributions. The full amount for the new State Pension is set above the basic level of means tested support and is pegged at the 2020-2021 rate of £175.20. If you have qualifying years on your record as of the 6 April 2016, a starting amount for your pension would be worked out and is the higher of either:
- The amount you would have got under the previous State Pension system up to 6 April 2016, or
- The amount you would get on your record to 6 April 2016 if the new State Pension had been in place at the start of your working life
Both amounts reflect any periods when you were contracted out of the Additional State Pension. Your ‘starting amount’ could be less than, more than or equal to the full new State Pension.
How Can I Forecast my State Pension?
You can get a State Pension forecast online from the Check your State Pension service. This provides personalised information, including your State Pension age, an estimate of how much State Pension you may get at that point and if you can increase this amount. It also allows you to view your National Insurance contribution history. For more information please visit Your State Pension explained – GOV.UK (www.gov.uk)