The new state pension – what is it, how much is it, and when will I get it?
There are a lot of changes happening with pensions right now, both with the state pension and with private pensions. For the moment, let’s forget about any extra provision you may have, or are planning to make, and just look at what you will get from the state. From this April, the current state pension system which is comprised of a basic pension, and an additional earnings related pension, will change to a new flat-rate pension. I apologise in advance, this is not going to be a thrill-a-minute read…unless you are genuinely excited by pensions, in which case you’re in for a treat!
If you work in the UK you are obliged to pay into the state pension through your National Insurance (NI) contributions. If you don’t work, you are also often credited as if you are paying in, for example if you are looking after children and receive child benefit. What you pay in contributions now pays for the pensions of people currently in retirement, and when you retire your pension will be paid for by the NI contributions of working people at that time. How much you get when you retire is therefore based on your NI record over your working life, and I’ll get on to that in a moment.
At what age can you claim your state pension?
First things first, at what age are you actually going to get your state pension? It used to be that women retired at 60, men at 65. This is no longer the case. As life expectancy has increased, the government has embarked on a process of equalisation of state pension ages so men and women retire at the same age. Also the age at which you can take your pension is increasing, with this being phased in based on your date of birth.
There are some very detailed state pension age timetables on the Gov.uk website which show how the state pension age is being phased in, though the simplest way of checking your state pension age is to use the state pension age calculator on the Gov.uk website.
If you are in your forties like me, you will get your state pension at age 67. If you are a bit younger, born on or after 6 Apr 1978, it will be 68. However, this could change before we actually reach retirement as the government will be reviewing the state pension age at least every 5 years. George Osborne said in the Autumn Statement 2013 that future generations should spend up to a third of their life in retirement, and the expectation is that the pension age will be increased to 69 for those retiring in the late 2040s (so those in their early thirties now), and to age 70 for those retiring in the early 2060s.
OK I’m aged 67, I’m claiming my pension, how much will I get?
If you retire on or after 6 April this year you’ll receive the new state pension, which will be £155.65 per week in today’s money. If, like me, you’re not paid weekly and it’s not instantly obvious how this compares to your current income, it amounts to £674.48 per month, or £8,093.80 per year.
If you were starting afresh from April, having paid no National Insurance contributions to date, you’d need 35 qualifying years to receive the maximum new state pension, with a minimum of 10 years to get anything at all.
If you’ve already made, or been credited with, National Insurance contributions before this April, then the government will take these into account when calculating how much new state pension you’ll receive. They’ll calculate a ‘starting amount’ based on the number of qualifying years you already have and what you would have received under the current state pension or, if it’s higher, what you would have received had the new state pension rules been in place over that period.
If your ‘starting amount’ is less than the new state pension, then you have between now and retirement to pay additional NI contributions to reach the maximum. If your ‘starting amount’ is equal to the new state pension, then you’ll get the £155.65. If your ‘starting amount’ is more than the new state pension, then the extra will be protected and you’ll receive this in addition to the new state pension. As I mentioned at the start, our current system is made up of two parts, a basic state pension and an additional pension. This additional pension includes the State Earnings Related Pension Scheme (or SERPS) which was in place from 1978 to 2002, and the State Second Pension (S2P) in place from 2002 to now. It’s if you have already built up some of this additional pension that you may find your ‘starting amount’ is higher than the new state pension.
No more ‘contracting-out’
Also worth noting is that many people will have contracted-out of the additional pension. This means either that they have paid reduced NI contributions, instead paying into a pension offered by their employer that gave them an equivalent pension; or that they’ve paid the same level of NI contributions, but some have been returned and paid into a private pension scheme. When the government works out your starting amount, they may apply a reduction to this figure to take into account any period in which you have been contracted out. According to news articles, there are data inaccuracies in relation to these contracted-out figures, so it’s not clear how reliable these pension statements will be. If you’ve been contracted-out, the new flat-rate state pension will no longer permit this, so you may find that your NI contributions will increase.
Eek, it’s complicated!
The rules around pensions are complicated, and transitioning from our current scheme to the new one involves detailed calculations. Fortunately, we don’t need to do any of these calculations ourselves. Hooray!
In addition to using the state pension age calculator to work out your pension age – this takes about 5 minutes – all we need to do is request a pension statement from the government and they’ll tell us exactly what we’re likely to get (assuming the calculations aren’t incorrect…). Either you can fill in form BR19, or you can call the Future Pension Centre on 0345 3000 168 / 0191 218 3600 and ask them to send you one.
But hold your horses for a couple of months, until after April, as any statement they send out at the moment will be based on current rules. I called this week and was advised to call back once the new rules are in place, as the statement will then be more accurate as it will be based on the new state pension rules. So that’s something for me to do in a couple of months.
So what do I take from this?
A few things actually – firstly, it’s actually very simple to find out how many qualifying years already on your NI record and what you’re likely to get, just wait a couple of months before getting your figures. Secondly, that the figures might be wrong, and also everything can change! Laws governing your pension could change again, so we can only plan the best we can based on what is currently known. Finally, the new state pension is not going to set you up for a life of luxury.
It’s better than the current basic state pension, but is not a huge amount more than the current UK poverty line. This is apparently set at 60% of median household income, varying according to your family situation – for example, the amount varies according to whether you are single or in a couple, also the number of children you have. Also some measures look at this figure before housing costs, some after housing costs. Using the poverty line calculator on The Children’s Society website, if you were aged 40, single, with no children, the median income in 2015 was apparently £232 per week after housing costs, with the poverty line therefore calculated as £139 per week after housing costs. Compare this with the new state pension amount of £155.65 and you can see that it’s only £16 more per week.
It seems to me to be more of a safety net that will allow you to survive, providing an excellent foundation which you can top up through additional savings. You don’t have to think about it or put money aside each month because you’re automatically paying for it through your NI contributions, but it’s not going to be hugely generous. If you want more options such as taking early retirement, then you’ll definitely need to save elsewhere.