The state pension, often called the "old age pension", is paid to people who have reached pension age, which is currently 60 for women and 65 for men. However, contrary to popular belief, it is not paid to everyone, although everyone who is entitled to a full basic state pension gets the same amount.
Eligibility is based on national insurance contributions (NICs), but another common misconception is that by paying NICs you are building up a personal ‘pot’ of cash which will eventually be used to pay your own pension. This is not the case. State pensions are funded on a pay-as-you-go basis; in other words the contributions of those in work fund the pensions of those who have already retired. Essentially, by paying NICs you are earning the right to be paid a pension when you reach retirement age.
Who qualifies?
In order to qualify for a full basic state pension you need to have paid, or have been credited with, enough national insurance contributions. Men need 44 ‘qualifying years’ and women currently need 39 ‘qualifying years’, though this will change in 2012 (see Future changes to state pension below).
A ‘qualifying year’ is a tax year during which you have made enough contributions on sufficient earnings to count towards your pension.
In certain circumstances you may receive national insurance ‘credits’ instead of paying contributions. For example, if you are out of work but registered for Jobseekers Allowance; if you are sick or disabled; if you are caring for an elderly relative and receive Carer’s Allowance; or you are a man aged between 60 and 65 who is no longer working.
Low-paid workers who earn more than the ‘lower earnings limit’ (£95 a week in 2009/10) but less than the ‘earnings threshold’ (£110 a week) will not have to pay NICs, but they will be treated as though they have. Technically these people are deemed to pay national insurance at 0%.
Women who stay at home to bring up their children and receive Child Benefit may qualify for Home Responsibilities Protection, which reduces the number of qualifying years needed for a full state pension (see Guide to pensions for women).
If you do not have a full NIC record when you retire you will be entitled to a reduced state pension, provided you have at least ten qualifying years.
How much is the state pension?
The basic state pension rises every year. From April 2009 the full basic state pension for a single person is £95.25 week and £152.30 for couples. Provided both partners in a marriage or a civil partnership have made enough national insurance contributions they will each receive the full amount for a single person.
The so-called married couple's pension is paid where only one partner (usually the husband) is entitled to a full basic state pension. In such cases a wife can receive an additional amount (£57.07 a week in 2009/10) based on her husband’s NIC record. A married woman can only receive this once her husband reaches the age of 65.
In cases where the woman is also of pension age the money will be paid directly to her, but if she is under 60 it is paid as an ‘adult dependency’ addition to her husband, although the amount may be reduced in cases where women are still working.
Women who have built up an entitlement to some state pension in their own right cannot claim the extra £54.35 in addition to their own pension, though they are paid whichever is the higher of the two.
Same-sex couples who have entered a civil partnership and who meet the criteria can also receive the married couple's pension.
At age 80, pensioners receive an extra 25p a week to the basic state pension.
Additional Pension
There is a second ‘tier’ to the state pension, based on earnings, that gives you extra money when you retire. The scheme started in 1978 and until April 2002 it was known as SERPS (State Earnings Related Pension Scheme). In April 2002 SERPS was replaced by the Second State Pension (S2P), although any rights built up under SERPS prior to this are protected.
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S2P provides a more generous pension than SERPS to people with low or modest earnings, and people who are receiving Incapacity Benefit, or Home Responsibilities Protection or Carer’s Allowance may also be credited into S2P.
For more information on SERPS and S2P and how it is calculated go to The Pension Service website.
Anyone who paid ‘graduated national insurance contributions’ between April 1961 and April 1975 may also receive a small Graduated Pension on retirement.
Contracting out
Currently, you do not have to join the second state pension scheme but you can ‘contract out’. If you are a member of your company pension scheme then the scheme itself may well be contracted out, in which case both you and your employer will pay lower national insurance contributions. You will not lose out when you retire, as an equivalent amount to the extra state pension you would have received will be provided by your company scheme.
You can also personally contract out and join a Stakeholder or other personal pension scheme, provided the scheme satisfies certain conditions (see Guide to Personal Pensions).
How can I tell if I will be entitled to a full state pension?
You can obtain a state pensions forecast and check whether or not you are on course to have paid enough contributions by completing Form BR19, obtainable from the Pensions Service on 0845 300 0168 or online at The Pension Service.
The closer you are to retirement the more accurate the forecast will be. If you are many years away from retirement the forecast will assume that you will be working and making contributions in the intervening years.
Can I make up a shortfall?
If you have ‘gaps’ in your national insurance record, because you lived abroad, for example, it is possible to pay voluntary contributions to protect your right to a full state pension. Voluntary contributions (known as Class 3 contributions) are a flat weekly rate (£12.05 in 2009/10), and they must normally be paid by the end of the sixth year after the one in which they were due.
From April 2010 changes are planned that will reduce the number of qualifying years needed to obtain a full state pension to 30. So if you are due to retire after that date you should seek advice from the Pension Service as to whether or not you could benefit from making voluntary contributions.
Are there any other ways to boost a state pension?
Most people will likely need to draw their state pension when they reach retirement age, but if you are still working, or you can afford to, you can defer taking your pension. This will give you a higher amount when you do decide to retire.
You can defer drawing your pension for a maximum of five years. By doing so you’d gain around an extra 7.5% for each year, so the full five years would give you approximately an additional 37%. This can either be taken as a higher weekly pension or as a taxable lump sum when you finally retire.
You must defer your pension by at least seven weeks to gain any benefit at all, and once you have started to draw your pension, you can change your mind and opt for deferment, but only once. You cannot keep chopping and changing.
Any SERPS, S2P or Graduated Pension will also be increased by the same percentage.
Pension Credit
The Government recognises that the basic state pension isn’t enough for pensioners to live on if they have no other income and only modest savings. A means tested benefit, known as Pension Credit, supplements a state pension for poorer pensioners to guarantee a minimum weekly income. This is £130.05 for single pensioners and £198.45 for couples.
Future changes to state pensions
It’s estimated that more than two-thirds of today’s 35-year-olds will live to see 85, and one in seven will celebrate their centenary. The fact that we are living longer has prompted a number of changes to state pensions to reduce the burden of future costs.
First, the state pension age for women born on or after 6 April 1950 will increase gradually to 65 between 2010 and 2020. Then, from 2024 to 2046, the state pension age will increase still further for both men and women. This increase will be gradual, happening over two years every decade as follows:
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State Pension age will increase from 65 to 66 between April 2024 and April 2026
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State Pension age will increase from 66 to 67 between April 2034 and April 2036
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State Pension age will increase from 67 to 68 between April 2044 and April 2046
The age you can claim your state pension will be determined by when you were born. You can find out exactly when you will be able to claim your state pension by using the state pension age calculator on The Pension Service website at The Pension Service.
From 2012 the Government has also promised to re-establish the link between state pensions and earnings, which was abolished in 1980, and the number of years needed to qualify for full basic state pension will be reduced to 30.
There will be weekly national insurance credits for carers of children and the severely disabled who spend more than 20 hours a week on caring duties.
The Second State Pension will evolve into a flat rate system by around 2030, and a new scheme of "personal accounts" will be introduced, also from 2012. Workers aged between 22 and state pension age will be enrolled automatically in the scheme, although they will be able to opt out. You will have to contribute 4% of your salary, while your employer will be obliged to put in 3%. The government will top with up with 1% through tax relief.
Unlike S2P, the self-employed and those not in work will be able to join the scheme.
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