Guide to the UK state pension system
What is the basic state pension allowance?
The basic state pension is £102.15 a week for single people and married people who qualify with their own national insurance (NI) contributions. For a married person reliant on their partner's NI contributions, the pension is £61.20 a week.
To qualify, you need at least 30 years' NI contributions. If you have fewer than this, your weekly state pension is calculated on a pro rata basis.
Can I get more than that?
You can also get extra money from the state on top of your basic state pension. This additional pension is called the second state pension (S2P); it was previously called the state earnings-related scheme (SERPs).
It is a top-up on your basic allowance, worked out according to your salary and the number of years you have worked. In some cases it can be as much again as the basic state pension. The self-employed are not eligible for the S2P as they pay lower NI contributions.
How are state pension increases measured?
From next April, the state pension will increase alongside the consumer prices index (CPI) measure of inflation. It is currently based on the broader retail prices index (RPI) measure, which is historically the higher rate.
Will the state pension amount change?
Yes. There are proposals to change the current system to a single flat-rate state pension of £140 a week. This would not apply to existing pensioners and would also get rid of the means-testing system currently used when working out S2P - but it has not yet been confirmed.
Is it true that the retirement age is about to rise?
The women's state pension age will increase gradually to 65 by April 2020 to be in line with that for men. The age for men and women will increase to reach 67 by 2036 and 68 by 2046.
Will the pension age rise further?
The government now proposes to push the state pension age up further. This would involve women's state pension age rising faster, to 65 by November 2018, and that for both men and women then increasing to 66 by April 2020.
Those changes are not yet law, but are expected to go through, with further revisions to the timetable for increases to 67 and 68 also under discussion. The government wants to link state pension age to rising life expectancy.
Why is the state pension system crumbling?
Dr Ros Altmann, director general of Saga and pension crusader shares her views.
"We have a pensions crisis in the UK and if we fail to deal with it, we will soon have a 'pensioners' crisis. State pension reform must remove mass means-testing and then private pension reform should consider re-naming private pensions and making them more flexible.
"Radical state pension reform is under consideration and needs to proceed urgently. However, a major reason people are not saving in a pension is that pensions have an 'image' problem. There have been so many scandals and disappointments with pensions people have now lost trust in them.
"Pension savings are falling because people no longer trust pensions and because new-style pensions are not offering them what they want. Younger savers do not want to tie their money up in a savings product that 'confiscates' their money for decades, which means they cannot touch it even if they really need it.
"The pensions industry needs to capture people's imagination, not lecture about doing 'the right thing'."
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
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).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).