State Pension
What is it?
The state pension is a weekly income paid by the Government to the vast majority of the population once they reach retirement age. It's funded via taxes paid by those still working.
The first state pension was introduced in January 1909 (The 'Lloyd George Pension'), although in those days the chances of the Government actually having to payout were slim -
the retirement age was set at 70 even though a man's life expectancy at birth was only 50!
The retirement age is currently 66. Life expectancy at birth is now around
89 and 92 respectively for men and women (source: ONS cohort figs). However, the fact we're all
living longer is one of the reasons the state pension retirement age is due to increase to 67 by 2028 and 68 by 2046 for both both sexes.
The state pension increases each year inline with the greater of prices, average earnings and 2.5%, a so-called 'triple guarantee'. The earnings link had been scarpped by the Thatcher Government
in favour of prices in 1980, but was restored via the triple guarantee in April 2011.
What types are there?
Although there is now only only one type of 'flat rate' state pension, for those who retired before April 2016 it could be supplemented by the second state pension (S2P) and/or the pension tax credit.
Flat State PensionState Second PensionPension Tax Credit
This is the standard pension you'll receive at retirement age provided your National Insurance (NI) contribution history meets the qualifying criteria. If your contribution history falls short you could
still receive a proportion of the basic pension.
Now no longer available. But the state second pension (S2P) was a 'top-up' to the old basic state pension (for employees only) based upon not only your NI contribution history but also your earnings over your working life. S2P replaced
the State Earnings Related Pension Scheme (SERPS) on 6 April 2002.
Under S2P you receive a proportion of your earnings between the NI lower earnings limit and an 'Upper Accrual Point' (UAP) for each qualifying year worked.
In the past it was possible to 'contract-out' of S2P, meaning some of your NI contributions are instead be paid either directly or indirectly into an occupational or personal pension.
This is effectively a minimum income guarantee for those age 62 and over. It mainly comprises a 'Guarantee Credit' element - if your total income is below a specified
minimum level then the Government tops it up to that minimum level.
If you're 65 or over there's also a 'Savings Credit' element which could give you a small additional top-up.
While the pension tax credit is undoubtedly a welcome safety net, it does discourage some people from savings towards retirement because it would mean them losing out on this benefit.
Do I qualify?
You must work 35 qualifying years to enjoy the full flat State Pension. A qualifying year is a tax year where your income was sufficient that you paid National Insurance contributions (or you were treated /credited as having paid them).
If you have at least 10 qualifying years you could receive a proportion of the flat state pension. You also normally have the option to 'buy-back' weeks/years to plug gaps in your NI contribution record, via NI Class 3 contributions.
The current rate is £17.45 per week, making this a generally good deal if you fall a little short of the period needed to qualify for a full basic state pension.
How much will I get?
The current flat state pension is £203.85 per week. If you reached retirement age before 6 April 2016 then you would be in receipt of the 'old' basic state pension of
up to £156.20 per week (plus any additional S2P/SERPS pension you may have).
Both state pensions currently increase with the greater of prices, average earnings and 2.5% each year. But what happens to the level of state pension long term is anyone's guess.
Can I delay taking my state pension?
Yes, and you'll receive a higher state pension in future if you do (or a lump sum equal to pension not taken plus interest at 2% above the Bank of England base rate). The extra pension you'll get depends
on whether you reached state pension age before 6 April 2016 ('old' state pension) or thereafter (flat state pension).
Flat state pension'Old' state pension
You receive 1% extra state pension in future for every 9 weeks you defer it, equal to an extra 5.8% if deferring a year.
You receive 1% extra state pension in future for every 5 weeks you defer it, equal to an extra 10.4% if deferring a year.
What happens if I die?
State PensionState Second Pension
Your state pension dies with you.
Your spouse can inherit between 50% - 100% of this pension, depending on when you were born.
Things can only get worse?
The outlook for the state pension is pretty grim for two main reasons:
- It's funded by those still working. While there are currently three workers to fund each pensioner, by 2050 it is expected there will be just one. You do the math...
- We're all living longer, on average, hence drawing a state pension for longer too. Life expectancy is predicted to continue increasing.
Unless these trends reverse then it's inevitable that future Governments will either have to continue increasing the retirement age and/or increase taxes if the state pension
is to be preserved at it's current level of around 15% of average earnings.
State Pension Jargon
Here's some of the more common state pension jargon you might come across:
| Pension Tax Credit | A state benefit that's effectively a minimum income guarantee for those age 60 and over. |
| S2P | State Second Pension, a 'top-up' to the basic state pension (for employees only) based upon NI contribution history and earnings over your working life. |
| State Pension | A weekly income paid by the Government to the vast majority of the population once they reach retirement age. |