The State Pension: understanding your entitlement

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Paying sufficient National Insurance (NI) contributions entitles you to a state pension payable from the State Pension Age and to make sure you put the best plans in place for your retirement it’s important to know exactly what you’ll get and when you’ll get it.   

The current state pension

The maximum amount you can receive from the existing basic state pension is £115.95 a week if you’re single and £185.45 for a couple (2015/16). This rises to £119.30 and £189.78 per week from 6 April 2016. To receive the full amount under the current system you must have paid, or been credited with, NI contributions for at least 30 years.

In addition to the basic state pension you may also be entitled to additional state pension. The additional state pension has gone through a number of changes and if you were paying in before 2002 it was called the State Earnings Related Pension Scheme (SERPS). If you were paying in after 2002, it’ll be called the State Second Pension.

The amount of additional state pension you’re entitled to is based on your earnings over the years and the NI contributions you’ve made or been credited with.  The maximum amount of additional state pension you can receive is currently £160 a week (2015/16).

Not everyone qualifies for the additional state pension (earnings related pension) and even if you do you could opt out or contract out of it, although this was stopped in 2012 for some types of pension. Contracting out means that you paid smaller NI contributions and the money you saved was put into your workplace or private pension. Many salary-related workplace schemes continue to be contracted-out, although the government will be stopping this on 5 April 2016 to coincide with the introduction of the new single-tire State pension.  

The new single tier state pension

But from 6 April 2016 the state pension is changing and if you’re a woman born on or after 6 April 1953 or a man born on or after 6 April 1951 then you’ll be affected. If you were born before these dates then your state pension will be calculated under the current system. 

The new regime aims to simplify the existing maze of rules and regulations that govern what you’re entitled to by creating a flat rate weekly payment. The full flat rate pension payable to new pensioners from 6 April 2016 will be £155.65 per week.

However, many people retiring in the early years after 5 April 2016 won’t be entitled to receive the full amount due to a lengthy transition to the new State pension. There are two reasons why you may not receive the full amount.

Firstly to qualify for the full weekly amount you need to have paid or been credited with 35 years of full rate NI contributions. This is up from 30 years under the current system.

If you’ve built up less than 10 years of contributions then you won’t qualify for any State Pension at all and the entitlement for those with between 10 and 35 years will be worked out on a pro rata basis.

Secondly you may have been contracted-out of the earnings related pension via your employer’s workplace pension scheme or a private pension scheme. This means that you and your employer would have paid lower NI contributions or some were paid into your own private pension scheme.

But there are a lot of people who will have already paid or been credited with NI contributions before the new regime comes into force on 6 April 2016. Therefore  DWP  will carry these contributions forward into the new system and your NI record up to 5 April 2016 will be used to calculate your starting amount under the new  single tier proposals.

The starting amount will be the higher of either:  

  • The amount you would get under the current state pension, or
  • The amount you would get if the new state pension had been in place at the start of your working life

Your starting amount will take account of any periods you were contracted out of the earnings related State pension and could be less than, more than or equal to the full new state pension weekly amount.

If you’ve built up enough earnings related state pension then it’s possible your starting amount will be more than the full new state pension and this extra amount will be protected.  

But if your starting amount is less than the maximum weekly entitlement under the new system then each additional year of NI contributions you make from 6 April 2016 will increase it by around £ 4.48 (£155.65 divided by 35), until you reach the full amount available under the new system or you reach state pension age.

As complicated as all of this sounds the good news is that you don’t have to work out what you’re likely to be entitled to for yourself and DWP will do it for you. If you are over age 55 you can request a statement based on the new single-tier state pension. If you are under this age you would still get a statement based on the old system. 

When can you start receiving your state pension?

Once you reach state pension age you can begin to receive the entitlement you’ve built up over your working life.

For men the state pension age is currently 65, while for women it’s started to rise from 60 in 2010 and will equalise at age 65 in November 2018. From December 2018 the state pension age will rise for both men and women, until it reaches 66 in April 2020 and 67 between 2026 and 2028.

The state pension is the starting point of any retirement planning strategy and once you know what you’re likely to receive it’ll help you to understand how much more private savings you need to make allowing you to plan properly for financial security in later life.