How to get to grips with the state pension: Sarah Coles

Not everyone is on the new ‘flat rate’ pension

This was introduced in 2016, and aimed to simplify things. It tends to be the one quoted when people talk about pension incomes, but an awful lot of people aren’t on it.

It’s worth saying at the outset that the rules over the years have been fiendishly complicated, and have changed. You position will depend on your age and circumstances, and anything short of an encyclopaedia can’t provide a detailed explanation of every possible situation, but I’ll do my best to cover the key points.

Very broadly, if you retired before 2016, you usually got a basic state pension and you might also have received an additional state pension. There are several different versions, and you may have contributed to more than one. Between 1978 and 2002, if you were employed, your National Insurance contributions might have entitled you to something under the state earnings-related pension scheme (or SERPS). This was then replaced, so between 2002 and 2016, you might have gained rights under the state second pension.

If you retire after 2016, and have already built pensions under the old systems, a calculation will usually be done to see what you would qualify for or under each system if it had run throughout your working life. The higher option is used and is known as your ‘starting amount’. In some cases, it means you may get more than the new flat rate, with the extra bit known as your ‘protected payment’.

Even if you’re on the new ‘flat rate’ pension, you may not get it all

You used to be able to ‘contract out’ of the additional state pension. This might have meant making lower National Insurance contributions. Otherwise, you paid National Insurance as usual, and some of it would go into a personal pension. If you have been contracted out at any stage, you may get a lower state pension. The calculations aren’t straightforward, but if you check your pension entitlement on the gov.uk website, you should see what you’re on track to get.

Even if you never contracted out, you may not get the full state pension

Under the old system, you needed 30 years of National Insurance contributions or credits to qualify for the full state pension (unless you were a man born before 6 April 1945 or a woman born before 6 April 1950 in which case you needed more). Under the new system, you need 35 years. If you have fewer than ten years, you won’t get any state pension, and if you have 10-35 years, you will get a proportion of it.

If you don’t have enough years, you may be able to get a credit

There may be gaps in your NI record caused by working abroad or time out of the workforce due to unemployment or caring responsibilities. The first step is to check your NI record is up to date and there are no errors. Then see if during one of these gaps you qualified for a benefit that comes with an NI credit. Sometimes credit is added automatically but sometimes you need to claim it. If this is the case, you can see if you can backdate a claim and get the credits added to your record.

You might be able to buy more years

You can pay to fill years - going back six tax years. The cost of plugging those gaps depends on what year you are filling, and if you’re plugging partial years, it’ll cost less. Before you hand over any money, you need to check with the Future Pension Centre that you’ll actually benefit.

The state pension rises every year – but not necessarily with the triple lock

Under the triple lock, the flat rate state pension rises by whatever is the highest of 2.5%, CPI inflation in September or average wages May-July. In April next year, it’s set to rise 4.8% with wages. The triple lock is guaranteed to remain for the life of this parliament, but the rising cost of pensions means it’s constantly up for debate. If you get an additional pension under the old scheme, it will increase by CPI inflation every year rather than the triple lock, so in April it’s up 3.8%.

The state pension age is changing

The state pension age is on the rise. It’s currently age 66 for both men and women and is on its way up to 67 - starting in 2026. Under the current timetable it will be on its way up to 68 in the mid 2040s, but there’s a state pension age review going on right now to determine where it goes from here.

You don’t get your state pension automatically – and you can put it off

You don’t get state pension automatically when you hit state pension age – you need to claim it. You’ll get a letter in advance telling you what to do. You can choose to put it off in return for a higher monthly payment – known as deferring - and your state pension increases by the equivalent of 1% for every nine weeks you wait. This works out as just under 5.8% of the state pension payment you would have received for every 52 weeks you hold on.

You can see why nobody could possibly call this system simple, and why it can be so difficult to understand what you might receive in retirement. It’s why anyone of working age should check the gov.uk website for their state pension forecast. You will need to have signed up to the Government Gateway, but it will show you what you’re on track to receive, so you can make plans. Of course, history has shown us that the rules can change, so you need to check back regularly. There’s little sign that any of those changes will come in this month’s Budget, but at this stage, the government is keen not to rule anything out entirely.

Income tax rumours

Another week has brought a fresh round of Budget rumours, and one that has spurred some debate is the idea of taking 2p off National Insurance and adding it to income tax. This has been proposed by the Resolution Foundation, which highlighted it could raise £6 billion, without affecting people receiving income from employment under state pension age – and therefore technically avoiding hitting ‘working people’.

However, it would hit several types of income which are currently subject to income tax and not employee National Insurance. This includes pension income, earned income from people over the state pension age, savings interest outside cash ISAs, and income for landlords and self-employed people. Someone on a total pension income of £35,000, for example, currently pays £4,486 in income tax at 20%. A rise to 22% would mean they pay £449 extra a year.