You’ve no doubt heard that change is in the air when it comes to the state pension. We’ve produced a guide to What’s changing in 2016 – but before you read it, it’s well worth taking a quick tour of the current state pension system to better understand what’s going to be different about the new version. And, of course, you’ll find this article essential reading if you’re retiring before 6 April 2016.
The current state pension is divided into two parts; the basic state pension and the additional state pension.
Basic state pension
The maximum basic state pension is £115.95 per week. To get the full amount, 30 years worth of National Insurance contributions or credits are required. Credits are given when claiming Child Benefit for a child under 12 (under 16 until 2010), Jobseekers Allowance, Employment and Support Allowance or Carer’s Allowance.
If you reach state pension age after 6 April 2010 but before 6 April 2016, and don’t have the full 30 years needed to get the maximum basic state pension, you’ll get a pro-rata amount based on the number of years worth of credits you have.
- For example, if you have 15 years of credits, you will get 15/30ths or half of the maximum amount (£57.98) a week.
- It’s possible to make up missing years by paying voluntary National Insurance contributions.
Additional state pension
The additional state pension is also known as the ‘state second pension’. Before 6 April 2002, it was known as the state earnings related pension scheme or SERPS for short. This is only open to employees, so self-employed people don’t qualify for this top-up.
The amount of additional state pension you receive depends mainly on two factors:
1) The amount of earnings on which you paid National Insurance Contributions; and,
2) Whether you were ‘contracted out’ of the additional state pension or its predecessors.
The calculation of additional pension is complex. It’s based upon ‘band earnings’ – earnings between the lower earnings limit (currently £5,824 a year) and an upper accrual point (currently £40,040 a year).
The amount of pension accrued between these band limits has varied over the years, as has the rate at which the amount earned is indexed between the year you earned it and your state pension age.
We did say this was complex! For these reasons, it’s virtually impossible to work out yourself how much you are due.
It is possible to ‘contract out’ of the additional state pension and its predecessors, but this will no longer be allowed after 5 April 2016. If you were contracted out, this means that you don’t get an additional pension. Instead, you get an employer’s pension – usually a final or average salary pension – or your own personal pension. Contracting out using a personal pension was stopped on 6 April 2012.
People who were contracted out received national insurance rebates either by paying a lower rate – this was the case when contracting out was via an employer’s pension – or by receiving an annual cash amount paid into a personal pension.
You receive no additional pension for years you are contracted out. However, most people have a mixture of contracted-out and contracted-in employment.
Read more about the new state pension
Find out how long you'll have to wait for your state pension
Visit Savings and Retirement