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State Pension

What is it?

The state pension is a weekly income paid by the Government to the vast majority of the population once they reach retirement age. It's funded via taxes paid by those still working.

Candid Fact The first state pension was introduced in January 1909 (The 'Lloyd George Pension'), although in those days the chances of the Government actually having to payout were slim - the retirement age was set at 70 even though a man's life expectancy at birth was only 50!

The retirement age is currently 65 for men and 60 for women (increasing to 65 by November 2018) and life expectancy at birth is now around 89 and 92 respectively for men and women (source: ONS cohort figs). However, the fact we're all living longer is one of the reasons the state pension retirement age is due to increase to 66 by 2020, 67 by 2028 and 68 by 2046 for both both sexes.

The state pension increases each year inline with the greater of prices, average earnings and 2.5%, a so-called 'triple guarantee'. The earnings link had been scarpped by the Thatcher Government in favour of prices in 1980, but was restored via the triple guarantee in April 2011.

What types are there?

Although there is only one type of basic state pension, for some it could be supplemented by the second state pension (S2P) and/or the pension tax credit.

Basic State PensionState Second PensionPension Tax Credit

This is the standard pension you'll receive at retirement age provided your National Insurance (NI) contribution history meets the qualifying criteria. If your contribution history falls short you could still receive a proportion of the basic pension.

Proposed flat state pension

The Government proposes to replace the basic state pension, S2P and pension tax credit with a flat £144 weekly state pension from 6 April 2016. Individuals will need at least 35 years of qualifying National Insurance contributions (NICs). The £144 is in 2013 terms and will be increased annually by the higher of earnings growth, inflation (CPI) or 2.5%.

In a nutshell some will get a higher pension than at present (especially the self-employed who aren't currently eligible for extra provision via S2P) in exchange for an extra five years' of NICs. But higher earning employees who might have otherwise built up decent extra pension via S2P could be worse off, with no reduction in NICs to compensate.

Those in final salary pension schemes are currently contracted out of S2P and pay lower NICs as a result, so they can expect to pay more National Insurance (1.4% on qualifying earnings) under the proposals.

In general, if you've built up extra pension via S2P/SERPS you'll receive any amount over the flat state pension amount, this excess is referred to as a 'protected payment'. However, the protected payment will only increase by inflation (CPI) each year, as would have been the case with S2P/SERPS.

Do I qualify?

Basic State PensionPension Tax Credit

You must work 30 qualifying years to enjoy a basic State Pension. A qualifying year is a tax year where your income was sufficient that you paid National Insurance contributions (or you were treated /credited as having paid them).

If you have at least a quarter of the required qualifying years you could receive a pro-rata proportion of the basic state pension. You also normally have the option to 'buy-back' weeks/years to plug gaps in your NI contribution record, via NI Class 3 contributions. The current rate is £14.10 per week, making this a generally good deal if you fall a little short of the period needed to qualify for a full basic state pension.

How much will I get?

Basic State PensionState Second PensionPension Tax Credit

The current basic state pension is £115.95 per week. A spouse who qualifies based on their partner's NI contributions receives £66.00 per week.

It currently increases with the greater of prices, average earnings and 2.5% each year. But what happens to the level of state pension long term is anyone's guess.

What happens if I die?

Basic State PensionState Second PensionPension Tax Credit

Your basic state pension dies with you. However, if your spouse receives less than the full basic pension their basic pension will normally be increased to the level you were receiving.

The S2P / SERPS payable to spouse on your death are as follows:

Sex Date of Birth % Payable
Male on or before 5 October 1937 100%
Male between 6 October 1937 - 5 October 1945 60% - 90%*
Male on or after 6 October 1945 50%
Female on or before 5 October 1942 100%
Female between 6 October 1942 - 5 July 1950 60% - 90%*
Female on or after 6 July 1950 50%
* percentage depends on exact date of birth.

Things can only get worse?

The outlook for the state pension is pretty grim for two main reasons:

  1. It's funded by those still working. While there are currently three workers to fund each pensioner, by 2050 it is expected there will be just one. You do the math...
  2. We're all living longer, on average, hence drawing a state pension for longer too. Life expectancy is predicted to continue increasing.

Unless these trends reverse then it's inevitable that future Governments will either have to continue increasing the retirement age and/or increase taxes if the basic state pension is to be preserved at it's current level of around 15% of average earnings.

State Pension Jargon

Here's some of the more common state pension jargon you might come across:

Pension Tax CreditA state benefit that's effectively a minimum income guarantee for those age 60 and over.
S2PState Second Pension, a 'top-up' to the basic state pension (for employees only) based upon NI contribution history and earnings over your working life.
State PensionA weekly income paid by the Government to the vast majority of the population once they reach retirement age.