The state pension - everything you need to know

The state pension forms a big part of lots of people’s retirement plans, with the money helping to bolster any income from personal or company pensions. But with the age being extended and worries about the rising cost of it for the government, there are concerns it could be trimmed back.

For those nearing retirement it’s important to know all the details about the state pension so they can know when they are entitled to it, how much they will receive and any pitfalls to watch out for.

Why does the state pension exist?

The main objective of the UK state pension system is to reduce poverty in old age, with a flat rate pension intended to reduce reliance on means-tested benefits in retirement.

The Basic State Pension was introduced in 1948 as a pay-as-you-go system. Working people paid National Insurance contributions based on what was needed to fund the benefits for current pensioners at the time. We still see plenty of misconceptions today about how people have ‘funded’ their own state pension pot or concerns that they are owed money back from the system, when in fact the system is a flat rate benefit funded by current taxpayers.

A second element was introduced for employed people, known as an ‘additional state pension’. It’s taken different forms over the years – from the Graduated Retirement Benefit, to SERPS and then the state second pension. Not all employees would’ve got it though – due to something known as being ‘contracted out’.

Anyone reaching state pension age on or after 6 April 2016 now receives what is known as the ‘new’ state pension. This overhaul was designed to simplify the system and get back to people building up their own pension benefit, rather than the reliance on spouses and civil partners that was a feature of the older regimes.

What is the state pension age?

The current UK state pension age is 66 for both men and women. There are changes coming that mean people born after 5 April 1960 will see a phased increase to age 67, and anyone born after 5 April 1977 will see a rise in stages to 68. Check your State Pension age.

You can retire before or after the state pension age though, you just won’t have that income to rely on. The age you can access your own pension pots is currently 55, rising to 57 from 6 April 2028.

How much is the state pension?

The full (new) state pension is currently £230.25 a week, equivalent to £11,973 a year. It’s paid every four weeks in arrears, and although it’s paid without any tax deducted, it does count towards your total taxable income.

You might get more than the full amount above if you’d built up an entitlement to the additional state pension mentioned above under the old system but hadn’t reached state pension age by 6 April 2016. You’ll see this extra money on your statement marked as a ‘protected amount’.

How does ‘contracting out’ affect my state pension?

If you were ‘contracted out’ of the additional state pension, you and your employer were either paying National Insurance contributions at a lower rate, or some of your National Insurance contributions were used to contribute to your pension pot instead of the additional state pension for those years.

Contracting out no longer exists, but it’s likely you would have been contracted out of the additional state pension at some point, particularly if you were in a defined benefit (e.g. final salary) scheme in the past. Other scheme types (e.g. personal pensions) might have also operated this way.

Check your statement or forecast – if your State Pension is lower than the full flat rate due to being contracted out, you might be able to top it up by making additional voluntary National Insurance contributions.

Can I claim or defer the state pension?

You’ll have to claim your state pension when the time comes – it doesn’t start automatically when you reach your state pension age. You can defer taking your state pension or ask to pause payments if you are already receiving them. If you defer it for at least nine weeks, then you’ll get an extra 1%. This works out as an extra 5.8% if you defer for a whole year. It’s usually only a good deal if you’re in good health and are still working beyond state pension age.

Can I inherit the state pension?

Under the new system, you don’t usually inherit any state pension from a spouse or civil partner. But you can inherit 50% of any protected payment they were receiving (or due to receive) in addition to your own weekly state pension. You must have been married or in a civil partnership before 6 April 2016 to be eligible.

There are different rules on inheriting state pension if one or both of you reached state pension age before 6 April 2016.

How to get a state pension forecast

A state pension forecast will show your pension age and a forecast amount based on your National Insurance record to date and another based on continuing contributions. There will also be information on your qualifying years and any missing years. The quickest way to get a forecast is online, but you can also complete a paper form BR19 and pop it in the post.

If you have gaps on your record or years where you haven’t made the full contribution needed, you might be able to plug these and get closer to the 35 full, qualifying years you need.

Firstly, check if you’re eligible for National Insurance credits. You could be eligible if you can’t work, are unemployed or caring for someone full-time now or in the past six years. You might also be able to ‘top up’ your record by paying voluntary National Insurance contributions. You can find out more by contacting the Future Pension Centre.

Does the state pension increase each year?

The flat rate state pension is usually increased in April each year in line with the ‘triple lock’. This provides an increase of the higher of:

• Average increase in prices (based on the CPI measure of inflation)
• Average increase in earnings
• 2.5%

What if I move abroad to retire?

If you move to an EEA country, the US or a list of other countries including Israel, Mauritius and the Philippines, your state pension will still increase each year. But there are more than 100 countries worldwide where the UK basic state pension is not uprated each year. These include Canada, Australia and New Zealand.