10 things you need to know about the new state pension
Get the lowdown on the new rules and find out what you will be able to claim and when with our guide.
1. You may not get your pension at 60 or 65
To be able to claim the new state pension, you need to have reached state pension age and this is no longer the straightforward 60 for women and 65 for men. As life expectancy continues to rise, the government is gradually increasing the age at which you are eligible to claim. By November 2018, the state pension age will have equalised at 65 for both men and women (meaning women are suffering the fastest hikes). However, after this point they will start rising together – initially to 66 from October 2020. You can check your state pension age at https://www.gov.uk/state-pension-age/y/age.
2. It does not get paid automatically
The state pension does not automatically start being paid into your bank account when you reach your state pension age – you have to claim it. Four months before you are due to retire, you should receive a letter from the government notifying you of your right to start claiming and telling you what you need to do. If you do not receive this letter, you can claim your state pension online at https://www.gov.uk/claim-state-pension-online, download a form and post it to your local pension centre or call the government’s claim line on 0800 731 7898.
3. You do not have to claim your state pension as soon as you are eligible
If you have not retired, or do not currently need your state pension, it is possible to defer payments and get a small uplift to your weekly payments in return. The uplift depends on when you reached state pension age.
If you reach state pension age on or after 6 April 2016
For people who reach state pension age on or after 6 April 2016, the uplift works out at a rate of 1% for every nine weeks that you put off claiming. This racks up to a rate of 5.8% a year. Example:
- You get less than the full state pension – for example, £120 per week.
- That means your state pension will be £6,240 a year.
- By deferring for a year, you’ll get an extra £360 (just under 5.8% of £6,240).
Whether or not this makes financial sense for you will ultimately depend on how long you live. If you defer your pension for a year, you would need to live around 19 years to make up the income you lose in that initial year, according to Hargreaves Lansdown.
If you reached state pension age before 6 April 2016
The terms are better for people who reached state pension age before 6 April 2016. They receive an uplift of 1% for every five weeks they defer, giving their state pension a boost of 10.4% over the year. As a result, they only have to live for around 10 years to make deferring for a year worthwhile.
You can also choose to get a one-off lump sum payment if you put off claiming your state pension for at least 12 months. This will include interest of 2% above the Bank of England base rate.
- You get the full state pension of £119.30 a week.
- Your basic state pension will be £6,203.60 a year.
- By deferring for a year, you’ll get an extra £645 a year (£12.40 extra a week).
4. You need to have paid enough national insurance (NI) or received credits
To be eligible for the new state pension in full, you need to have paid 35 years of NI contributions (up from 30 for the old basic state pension). However, you don’t necessarily need to have been in employment for that length of time, as credits will be paid on your behalf if you stopped working to raise young children or to be a carer.
Credits will also have been paid if you are or were ever in receipt of certain unemployment and sickness benefits. If you have less than 35 years’ contributions (but more than 10), you will receive a proportional amount.
5. You can plug gaps in your NI record
If you have not paid enough NI or received sufficient credits, it is possible to buy voluntary contributions. You can buy contributions covering the last six years, although in some cases (depending on your age) you may be able to buy more.
The cost of contributions varies according to whether you need to buy class two or class three contributions (typically, it is class three unless you are self-employed or have worked overseas), as well as the years that you need to cover. The rates for the 2016/17 tax year are £2.80 a week for class two contributions and £14.10 a week for class three. For more information, you can call HMRC on 0300 200 3503.
6. If you have ever ‘contracted out’ you won’t get the full state pension
Although you may have worked for 35 years or more, deductions will be made to your state pension if you contracted out of the additional state pension at any stage in your working life. The additional state pension provided a top-up to the basic state pension for people in work with contributions based on your earnings.
Many members of workplace pension schemes ‘contracted out’ of this scheme in return for NI rebates that were diverted into their private pensions. The new state pension replaces both the basic and additional state pension and, as such, those who did not pay into the latter (and paid less NI) get less under the new scheme as a result. Theoretically, losses to your state pension should be made up for with gains to your private pension.
7. You may no longer benefit from your spouse’s pension
Prior to the introduction of the new state pension, widows were able to claim 50% (more for older people) of their spouse’s additional state pension when they died. Transitional arrangements mean that, in some cases, you may continue to have rights to an inheritance of your deceased spouse’s additional state pension.
Once we reach a time where both partners are retiring in the era of the new state pension, this will cease. However, 50% of any ‘protected payments’ your spouse receives as part of the new scheme (which bring their weekly payments above £155.65 a week, see point 9 for more information) can be passed to a spouse on death.
Under the old rules, it was also possible to take advantage of a deceased spouse’s NI record to ensure they were able to claim the basic state pension in their own right, which was known as a ‘derived benefit’. With the new scheme, your pension will be calculated based on your NI record alone.
8. Your state pension may be affected if you get divorced
Divorcees will no longer be able to benefit from a former spouse’s NI record under the new state pension, but the amount of state pension you receive may still be affected by divorce. For example, you may be able to make a claim on your ex-spouse’s state pension, or visa versa, with a pension sharing order.
9. The new scheme will take into account benefits or entitlements you have accrued under the old state pension
The government will make two calculations when setting your state pension – these are the amount you would be paid under the old scheme (including the basic and the additional pension) and the amount you would have received under the new scheme had it applied for your whole working life.
Your pension will be the highest of these two figures and is known as your foundation or starting amount. This provides a degree of protection for those who would have been entitled to more under the old scheme – through additional state pension payments, for example, or derived benefits based on a former or deceased spouse’s NI record.
As the additional state pension ceased on 6 April 2016, you can no longer carry on growing this element of your pension or benefit from a spouse’s NI contributions made after this date. Your foundation amount will also take into account any benefits you may have received as a result of your marital status. Any money paid in excess of the new flat-rate pension payment is known as a ‘protected payment’ and will also increase in line with inflation.
10. The government can give you a state pension statement
While the new state pension will be much easier to understand for those just starting their working lives, it will remain confusing for those who are retiring under the new scheme, but who accrued the bulk of their benefits under the old one. To get a clearer picture of how much NI you have paid, how much state pension you can expect and when you will be able to claim it, the over-55s can request a state pension statement from the government.
Apply online https://www.tax.service.gov.uk/checkmystatepension or call the Future Pension Centre on 0345 3000 168. The onus is on you to request this information, but the government’s Work and Pensions Committee recently recommended that annual statements are automatically sent to everyone over the age of 50.
Who will be affected by changes to the new state pension?
Only people who reached state pension age on or after 6 April will claim the new state pension. Those who reached state pension age before this date will continue to receive the basic state pension and, if they were in work, the additional state pension.
Winners and losers under the new state pension
The government’s claims that the state pension revamp has been a cost-neutral exercise, so rather than spending any more money on pensions it is simply re-working how that money is distributed in order to make the system fairer and more transparent. As a result, there will be winners and losers under the new scheme.
- Stay-at-home mums: Women who take time out of work to care or raise a family will be better off – seeing the maximum they are able to claim rise from a current £119.30 a week to £155.65.
- The self-employed: As people who run their own businesses were previously excluded from the additional state pension, they will also see their maximum pension rise to £155.65.
- Higher earners: The abolition of the additional state pension will put a cap on the amount of state pension people are able to claim. Although additional state pension benefits accrued prior to April 2016 will be protected, there will be no ability to carry on boosting this entitlement. Likewise, under the new scheme the working life is capped at 35 years where previously workers could pay into the additional state pension throughout their working life.
- Stay-at-home mums and self-employed people who reached state pension age before 6 April 2016: This group will miss out on more than £35 a week in state pension by not quite being old enough to benefit from the new scheme. This will be doubly frustrating for women born in the 1950s who have seen their state pension age rise, but ironically not fast enough to enjoy an uplift when they are eventually able to claim.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.