The New State Pension – Frequently asked questions
Royal London recently ran a consumer webinar on State Pensions and had over 600 questions asked in advance of the session and then another few hundred asked on the day so clearly there's a huge amount of confusion about State Pensions.
In this article I want to highlight some of the FAQs we received as your clients will be asking the same questions. Let’s start with the basics:
How much will I get?
This will be dependent on how many years National Insurance (NI) contributions have been paid and/or NI credits have been received. The full New State Pension is £203.85 per week if you have a combination of 35 years NI contributions and NI credits.
The equivalent annual amount is £10,636.60 but surprisingly this doesn’t equal 52 payments of £203.85 per week. That’s because the annual amount is calculated by dividing the weekly amount of £203.85 by 7 to get a daily amount (£29.12) and multiplying this by 365.25. The 0.25 is to account for leap years.
If you have fewer than 35 years combined NI contributions and NI credits, then you'll receive a reduced amount. For example, someone with 25 years will get 25/35ths of the full amount, someone with 30 years will get 30/35ths, but someone with 45 years will be limited to a maximum of 35/35ths.
You only start to accrue New State Pension benefits when you have 10 years combined NI contributions and NI credits.
You can check how much you’ll receive by getting a State Pension forecast using the following link (opens in a new window).
Why don’t I receive the full amount?
Apart from not having enough qualifying years, the main reason is if you were contracted out at some point. To understand this, we need to go back to 2016 when the New State Pension was introduced.
Your National Insurance record before 6 April 2016 is used to calculate your ‘starting amount’. This is part of your New State Pension.
Your starting amount will be the higher of either the amount you'd get under the Old State Pension rules (which includes Basic State Pension and Additional State Pension) or the amount you'd get if the New State Pension had been in place at the start of your working life.
Your starting amount will include a deduction if you were contracted out of the Additional State Pension as you were paying lower National Insurance contributions than someone who was contracted in. It’s this deduction which can mean you won't receive the full New State Pension.
A couple of other reasons why you may not receive the full New State Pension is if you were self-employed as you were never part of Additional State Pension (also known as State Second Pension, 'S2P' or 'SERPs') and also women who paid the lower stamp so paid less NI contributions.
What is COPE and should I take this off my State Pension forecast?
The pension you get from your workplace or personal pension for the periods you were contracted out, should include an amount that, in most cases, will be the equivalent of the Additional State Pension you'd have got if you hadn't been contracted out. This is your Contracted Out Pension Equivalent (COPE) amount. The COPE estimate is shown on your State Pension forecast and is shown as a monetary figure. The COPE figure is just for reference, it doesn’t change the forecast therefore you don’t need to take this off your State Pension forecast.
How old will I be when I get the State Pension and can this age change again?
The State Pension age for both men and women is currently 66 and increases to 67 from 2028. It’s being phased in from 2026. This phasing impacts those born between 6 April 1960 and 5 March 1961 who will reach their State Pension age at 66 years and the specified number of months. And then is due to increase to 68 from 2046, with again it phasing in this time from 2044. You can get a State Pension age forecast using this link (opens in a new window).
And to answer the other question, could it change again, well the short answer is, yes, it could. In the Government’s latest quinquennial review of the State Pension they assumed the State Pension age would increase to 68 from 2039 and then to 69 in 2073 however these were just assumptions. The Government though have confirmed they are committed to give us at least 10 years notice of any intention to increase the State Pension age.
Note, you won't normally receive your State Pension automatically. You should get an invitation letter from the Pension Service 4 months before you reach State Pension age, explaining how to claim your State Pension. If you haven't received an invitation letter with 2 months to go, call the Pension Service on 0800 731 7898.
Your State Pension will then be paid every 4 weeks into an account of your choice and will be paid in arrears.
Can I receive more than £203.85 per week?
There are two ways you can receive more, if you have over a certain amount of Additional State Pension, or if you delay taking the New State Pension after your State Pension age. The additional amount is 1% extra for every 9 weeks delay which is equivalent to roughly 5.8% per annum.
Should I delay taking the New State Pension?
One consideration is if you delay taking the State Pension, you’re missing income for that period. So, although you'll get an extra 5.8% per year, when will you catch up with the missed income? You need to take into consideration the rate of tax you’re paying. So, for example if you’re a higher rate taxpayer, then your State Pension will attract higher rate tax. But of course, what you might try and achieve is if you’re a higher rate taxpayer initially, perhaps because you’re still working, then delay your State Pension until you’re a basic rate taxpayer so all your income will be taxed at basic rate.
If you’re a higher rate taxpayer at State Pension age, and you delay taking your State Pension for a year when you’ll be a basic rate taxpayer, it will take to age 77 to make up for the missed income. However, if you were either a basic or higher rate taxpayer both at State Pension and after the delay of one year, then the breakeven age would be 80.
(One caveat is we’re assuming for higher rate taxpayers, the maximum income including State Pension is £100k, therefore we’re not taking in to account the personal allowance tax trap. The reason is we don’t expect many people to receive taxable income over £100k in retirement as they may be utilising different tax wrappers to generate income e.g. ISAs.).
Should I top up my State Pension?
If you do go online and get your State Pension forecast, find you do have missing years, you’re not going to get a full New State Pension and you are looking for guaranteed income in retirement, topping up via class 3 NI contributions is about the most cost-effective way to go about it. Admittedly you are limited to how much you can get but it is cost effective. Just for reference, buying an extra year of State Pension via class 3 NI contributions costs £907.40 which will get you 1/35 of NSP, approx. £303.90 per annum increasing by the triple lock. Therefore, you only need to live 3 years to break even. If you are covered by the New State Pension system you can top up your National Insurance record for years from 2006/07 onwards. You need to do this by 5 April 2025. After this date, missing years have to be topped up within six years.
There's no reason in principle why you can't top up your pension after pension age. This is provided that you come under the 'New' State Pension system and reached pension age on or after 6 April 2016.
The process is however slightly different for those who are already drawing a pension, and there are some different issues to think about.
The first difference is that whereas people in work need to phone the Future Pension Centre (0800 731 0175) at the DWP to talk through their options, those who are already drawing a pension have to speak to the Pension Service (0800 731 0469).
The second difference is that for those who are already drawing a pension, any boost to their National Insurance record will only affect their State Pension payment from when the contributions are paid.
What happens to the State Pension on death - will any pass to my spouse?
Under the New State Pension rules, each person builds up their own entitlement in their own rights, therefore on death no New State Pension will be passed on to the surviving spouse.
However, the surviving spouse may be entitled to inherit part of their deceased partner’s Additional State Pension if their marriage or civil partnership was before 6 April 2016 and one of the following applies: their partner reached State Pension age before 6 April 2016; or they died before 6 April 2016 but would have reached State Pension age on or after that date.
It’s also possible to inherit half of their partner’s protected payment if their marriage or civil partnership began before 6 April 2016 and their State Pension age is on or after 6 April 2016 and they died on or after 6 April 2016. They might also be able to inherit an extra State Pension or a lump-sum payment if their late spouse or civil partner reached State Pension age before 6 April 2016 and put off claiming their State Pension.
The New State Pension will be available to most of you and your clients, and is an integral part of retirement planning. For some it will make up most of their income in retirement but for others it may simply cover off their basic income needs. Regardless, it’s important we all have some knowledge of this exceptionally valuable benefit.
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