The UK State Pension Explained

Leaf Financial Advisers Ltd. - Bristol Pension Adviser

What is the UK State Pension?

The UK State Pension currently provides financial support for about 13 million people across the UK, and for many it is their main or only source of income to fund their retirement. It is a regular payment made by the government (delivered by the DWP) for all those who are eligible and have reached State Pension Age.

A new type of State Pension was introduced in 2016 – the “New State Pension”, which replaced the old “Basic State Pension”. Anyone who reached state pension age after 6 April 2016 will receive the New State Pension. If you reached pension age before then then you should be on the Basic State Pension.

The full New State Pension is currently £179.60 (for 20/21) although how much you will actually receive will depend on a few factors, such as the number of years of National Insurance (NI) contributions.

You can keep working after you reach State Pension age. ‘Default retirement age’ (a forced retirement age of 65) no longer exists.

The State Pension can be a valuable foundation for your retirement income and a key part of wider pension and retirement planning. It’s therefore important to understand how much you are likely to receive.

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New State Pension replaces the Basic State Pension

A new type of pension was introduced in 2016, called “The New State Pension” which replaced the old “Basic State Pension”. Which one of these 2 schemes you’ll claim depends on when you reach your State Pension age.

You can claim the New State Pension if you’re:

a woman born on or after 6 April 1953, or
a man born on or after 6 April 1951.

You can claim the basic State Pension if you’re:

a woman born before 6 April 1953, or
a man born before 6 April 1951.

Even if you choose to delay/defer your State Pension, you’ll still be paid on the basis of which state pension you qualify for when you do start claiming it.

How much State Pension will I get?

The full rate for New State Pension is £179.60 a week for 2021/22. But the amount you get could be more or less than this.

Both the old and the new State Pension systems are based on your National Insurance Contributions (NIC’s) or sometimes based on your partner’s NIC’s. You can build up NI contributions by:

paying NI whilst working,
claiming NI credits when on certain benefits, such as unemployment benefits,
making voluntary NI contributions.

The number of years where you have made NI contributions is the basis for working out how much State Pension you will receive. How many depends on whether you’d claim the Basic State Pension or the New State Pension. If you will reach your State Pension Age in more than 30 days then you can use the UK governments online tool to check how much state pension you are currently entitled to. This will tell you how much you’re likely to get based on your current National Insurance record.

There are quite a few rules will which determine how much you may get based on your personal situation, but the main rules are:

You need 35 qualifying years of NI contributions to get the full New State Pension.
If you’ve got between 10 and 35 qualifying years, you’ll get part of the full rate. This is 1/35th for each qualifying year you have. So, if you have 15 years, for example, you’d get 15/35ths of the full rate.
If you’ve got under 10 years, you usually won’t be entitled to any State Pension.

When can I get the State Pension

You can claim State Pension when you reach State Pension age. For a long time the State Pension age was 65 for men and 60 for women, however it’s recently risen to 66, is now the same for all genders and will reach 67 by April 2028 (for both men and women).

There are plans to continue to adjust the pension age based on changes in the UK life expectancy.

You can check the date that you will reach state pension age on the government website with their Check your State Pension age tool. Bear in mind though that this calculator doesn’t take into account any future changes to legislation and likely further pension age increases that may take place between now and your retirement. Eventually, the State Pension age will be linked to average life expectancy.

Once you reach State Pension age, you don’t have to stop working. If you do continue working, you no longer need to pay National Insurance Contributions, which means you’ll keep more of your wages. And if you delay claiming your State Pension, you may be eligible for extra money when you eventually retire.

Your State Pension age is the same as your Pension Credit age unless you are a man born before 6 December 1953.

Deferring your State Pension

Usually, you start to receive your state pension when you reach State Pension Age. But you do have the option of deferring when your pension begins, during which period you will not receive any state pension. State pension deferral means that you delay claiming, or stop your state pension, until a time that suits you.

Deferring your state pension may mean that you get extra money in the future. If you reached state pension age before 6 April 2016, then you can take the extra money as a lump sum payment or as extra state pension. If you reach state pension age on or after 6 April 2016, you can only get extra state pension, there is no lump sum available.

To get an extra amount of State Pension, you need to delay taking it for a minimum amount of time. The amount you get depends on when you reach State Pension age and how long you delay taking it. The longer you delay, the more you’ll get. Currently, your State Pension will increase by 1% for every nine weeks you put off claiming. This works out at just under 5.8% for every full year you put off claiming.

Any extra amount is paid with your State Pension and might be taxable.

State Pension after the death of a Spouse or Partner

The state pension does not simply end when a loved one dies. You may be entitled to extra payments from your deceased spouse’s or civil partner’s pension. However, this does depends on which type of state pension they are on and their National Insurance Contributions.

If a spouse or partner is on the Basic State Pension (reached State Pension age before April 6th 2016) then the Pensions Service should be contacted to check what can be claimed. It may be possible to increase the Basic State Pension by using the deceased qualifying National Insurance Contributions, if the full amount is not already received.

If they had reached State Pension age on or after April 6, 2016, then there is a tool on the government website called “Your partner’s National Insurance record and your State Pension” that can calculate what entitlement the surviving spouse has to increased state pension payments.

For people who are single or divorced, or who have had their civil partnership dissolved, it may be that their estate can claim some of a basic State Pension. This is if that person dies after reaching State Pension age, and only if the State Pension had not been claimed. In this circumstance, the estate can claim up to three months of the basic State Pension.

Pension Credit - Guarantee Credit

What are Pension Credits and do you qualify?

Pension Credits are a benefit you may be eligible to receive if you are retired and earn below a certain income threshold.

There are 2 parts to Pension Credits: Guarantee Credit and Savings Credit.

Guarantee Credit is available to everyone who is of State Pension age and is on a low-income. If you qualify then your pension income will be topped up so that you receive the weekly following payment:

£270.30 for couples
£177.10 for individuals

If you income is above these amounts then it’s unlikely you’ll qualify for the Guaranteed Credit. However there are exceptions and if you meet one of the following conditions then you may be eligible:

You are a carer
You have a severe disability
You have to pay housing costs like a mortgage

Savings Credit is extra pension income paid if you’ve got savings or if your income is higher than the Basic State Pension. However, it’s only available to those who came of retirement age before April 6 2016. You can get up to:

£15.62 for couples.
£13.97 extra per week for individuals

To apply for pension credit you can call the Pension Credit claim line on 0800 99 1234

If you are of retirement age but your live-in partner isn’t, then you might not qualify for Pension Credits. As of May 15th 2019 new claims for couples’ Pension Credit have to meet the following criteria:

Both of you need to have reached Pension Credit qualifying age, or
One of you has reached Pension Credit qualifying age and is claiming Housing Benefit for you as a couple.

If you were receiving Pension Credit as a couple before the rule change, you shouldn’t be affected and can carry on receiving it, as long as your circumstances don’t change (e.g. if you have a higher income).

However if you were previously claiming as an individual and moved in with your partner after May 15th 2019, you’ll no longer qualify for Pension Credit as your circumstances have changed. If this happens, you won’t be able to submit a new claim as a couple if you don’t meet the new criteria specified above.

Pension Credits not only boost your income, if you qualify then it can give you access to other benefits too. These may include:

A cold weather payment of £25 if the temperature drops to or goes below 0°C for 7 days in a row.
It’s unlikely you’ll have to pay Council Tax (unless other people live with you).
If you rent your home, you may get your rent paid in full by Housing Benefit.
Homeowners could qualify for help with surplus charges such as ground rent, interest on mortgages and service charges.
You’ll get free NHS dental treatment, and you can claim help towards the cost of glasses and travel to hospital.
Carers could be entitled to an additional Carer Premium or Carer Addition, worth up to £37.70 per week (at the time of writing).
Those aged 75 and over are exempt from having to pay for their TV license if they receive Pension Credit (this was introduced in 2020).

Risks of Relying on the State Pension

Most retirees currently rely on state pension for over half of their income, with the poorest retirees relying on the state pension for 78% of their income, according to a report by the Pensions Policy Institute.

The future of the state pension has been of concern, as a recent report from the Government Actuary Department forecast that without intervention, the ‘National Insurance Fund’ – which collects National Insurance contributions to pay out benefits, the largest of which being state pension – will run out as early as 2032. So while the state pension could form part of your retirement income at the moment, it’s advisable to consider other options as well when planning your retirement savings.

Further Information and Next Steps

Understanding when and how much you will receive from your state pension is a key step in planning your retirement.

Moving from your employed life to the retirement phase is one of the biggest changes in most people lifetimes. The change isn’t just in what you do with your day to day life but how it is paid for, as this fundamentally changes. There is a lot more responsibility on the retiree to make sure their finances are arranged the best possible way. Understanding how much you’ll get from your state pension is one of the first steps you need to take. After this you can begin your more though plan, essential if you want to maximise the growth of your pension pots through effective, tax efficient planning.

Thinking seriously and starting to plan your retirement can never happen too early. The longer you have time to plan the better the plan is likely to be and if you have time on your side even what may seem like small pension contributions can grow to significant sums if invested in the right manner.

If you would like a no-obligation chat with a an Experienced Pension Adviser then please get in tough – 01173 823 823 or contact@leafifa.co.uk – and we will be able to answer any queries and discuss what benefits pension planning may have for you.