Part-time workers: are you heading for a depleted state pension?
Many people are going to be reliant on the state pension when they retire, but are you going to be entitled to the full amount?
Thousands of part-time workers are in for a shock when they retire as they will not be allowed to claim the full £107.45 a week that most people are entitled to. Mums, older people who have cut down their working hours and those struggling to find full-time work are particularly at risk from losing valuable benefits in retirement.
With the number of part-timers now at a record high of eight million, we explain how to ensure you get the full state pension.
How do I qualify for a state pension?
The full basic state pension is given to those with 30 qualifying years of national insurance (NI) contributions. Anyone earning more than £5,564 a year, or £107 a week, is deemed to have made a NI contribution. But in an odd quirk of the system, NI isn't actually payable until you start earning £7,592 a year, or £146 a week.
These thresholds apply to each separate job you have. For example, if you earn £3,000 a year in two jobs, you are not deemed to have made an NI contribution even though your total earnings are above the threshold.
This system means that someone who never earns more than £5,564 a year from one job runs the risk of receiving no state pension when they retire. Those whose earnings have been higher for less than 30 years will receive a proportionate share of the state pension.
For example, someone who had only paid NI for 15 years when they retire would receive just half the state pension. As the full amount is currently £107.45 a week, they would receive £53.72 a week. Remember, that the NI thresholds change slightly every year in line with inflation.
How can part-time workers get a state pension?
You need to ensure you are credited with an NI contribution every year. If you are approaching retirement and have already accrued 30 years' worth of contributions, you needn't worry. If you are a carer or have children under 12 the government should credit you with an NI contribution because you are working by looking after them.
If your earnings are just below £5,564, one way to ensure you are making enough contributions is to ask your employer for a small pay rise. If someone earning £5,000 a year was able to increase this to £5,564 a year (£10.84 a week more), they would be able to build up entitlement to their state pension. Even better, neither you nor your employer would actually have to make NI contributions as you would still be below the £7,592 NI payment limit.
Malcolm McLean, a pensions expert at consultants Barnett Waddingham, says: "I would urge everyone working part-time to check out their situation. If only a very small increase in earnings is required, employers should be sympathetic to a small pay rise. After all, the employer will not have to pay any extra NI."
I'm a mum with young children . Do I need to worry about my pension?
On 6 April 2010, the government introduced new NI credits to ensure that young parents and carers don't miss out on a state pension. The government may give you an NI credit if you receive child benefit for anyone under 12; are a registered foster carer; or if you care for a disabled person for at least 20 hours a week.
Previously, this credit system was called Home Responsibilities Protection (HRP). If you reached state pension age after 5 April 2010, you will have received NI credits rather than HRP. If you have years of HRP before 6 April 2010 then up to 22 of these years will have automatically been converted into NI credits.
If you get child benefit for children aged under 12 you should get an NI contribution automatically, although it is worth making sure you've been credited. If you are a carer you may need to apply – you can download the carer's credit application pack at direct.gov.uk or call the Carer's Allowance Unit on 0845 608 4321.
I can't increase my pay and I don't get NI credit. What now?
"Don't panic. Most people spend about 45 years working and you only need 30 years of contributions, so if you are still relatively young you probably have enough time to make up your record," says McLean.
It is possible to make voluntary NI contributions and for the 2012/13 tax year it costs £13.25 a week. This can be a good idea in the long term, but you must think carefully about whether or not this is worthwhile.
"For example, if you are a 30-something mum with teenage children you may feel that you plan to work in future and you have enough time to make up your contributions," says Tom McPhail, head of pensions research at Hargreaves Lansdown. "But if you're in your 50s with only 15 years of contributions behind you, voluntary contributions may be a good decision."
How can I check my NI record?
You can ask HM Revenue & Customs (hmrc.gov.uk; 0845 302 1479) for a statement of your NI account. You can also get an idea of how much you will receive when you retire from the Future Pension Centre at The Pension Service (0845 3000 168).
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).