A handy guide to help you review your state pension provision.
An overhaul in April 2016 replaced the old two-tier system with a flat-rate state pension, which is now (in 2019/20) £168.60 per week. However, the amount a person is entitled to depends on their National Insurance (NI) record.
NI record factors that would influence the amount of state pension received are:
If you have already built up NI contributions under the pre-2016 system, you’ll be given a ‘starting amount’. This is the higher of:
- the amount under the pre-2016 system including basic and additional pension
- the amount due if the new state pension had been in place at the start of working life.
If the ‘starting amount’ is more than the full amount of the new state pension, any amount over that level will be protected and paid on top of the full amount when you start to claim the new state pension.
If the starting amount is less than the full amount of the new state pension, you may be able to build up a higher level of new state pension through contributions and credits you make between 6 April 2016 and when you reach pension age.
So, your state pension amount will be the higher starting amount figure plus the value of any qualifying years you add from 6 April 2016 onwards, up to the full rate of the new state pension.
The tool available on the state pension service website will calculate this for you.
‘Contracted out’ scheme
If you were in a ‘contracted out’ personal or workplace pension, it would have paid NI contributions at a lower rate because some of the NI contributions were paid towards the private pension.
When working out the ‘starting amount’ for the state pension, a deduction will be made from both calculations, to take into account the lower NIC made because of the ‘contracting out’ arrangement.
NI contribution made only after 6 April 2016
If you made no NI contributions before 6 April 2016, your state pension is calculated entirely under new state pension rules. This is more likely to be relevant for those born after the year 2000 or those who became resident in the UK after 2015. The position would be as follows:
- 35 years or more of NI contributions: you will get the full amount
- between 10 and 34 years of contributions: you will receive a proportion of the pension
- under 10 years of NI contributions: you are not usually eligible for the new state pension.
Find out about more about state pension eligibility, claims and payments here.
Deferring state pension
If a person reaches state pension age and defers taking it out, it could mean that they receive extra state pension when they start claiming.
The state pension increases by 1% for every nine weeks deferred, or around 5.8% for each full year. This may not apply if the person receives certain benefits.
Find out more about deferring your pension here.
If you have gaps in your NI record
If you have gaps in your record and want to boost your state pension, you could make voluntary NI contributions.
You can only pay for gaps in your NI records from the past six years. Payments for gaps more than six years ago are sometimes possible depending on your age.
Voluntary NI contributions are a popular option, with people paying £119.3m in voluntary contributions in the last year, compared with just £12.8m in 2016/17 – a nine-fold increase in just two years.
But it is important to be careful about paying voluntary NIC because in some cases paying extra NICs will not always increase your pension.
You may wish to speak to DWP Future Pension Centres to understand their state pension before you make voluntary National Insurance contributions.
Article from ACCA In Practice