The new State Pension (nSP) came into force for people who reach state pension age on or after 6 April 2016. The good news is existing state pension benefits are taken into account when calculating new State Pension benefits, the bad news is it's complicated. This is largely because of the complexity of the current system which has resulted in a situation where even the DWP struggle to calculate exactly what an individual is entitled to!
When a change is made, a way has to be found to protect the existing entitlements which people have built up.
Entitlements were protected by simply layering the new benefit structure on top of existing benefits.
Existing pre 6 April 2016 entitlements are consolidated in one single starting amount.
Further entitlements, if applicable, are built on top using the new rules.
The starting amount is the higher of an individual's entitlement under the old state pension rules and the amount they would notionally have earned under the new nSP.
Both values are calculated as at 5 April 2016 so that they may be compared. The larger amount becomes the starting amount.
If the starting amount is less than the maximum rate under the nSP individuals can continue to build on this using their NI contributions (or credits) up to the equivalent of £168.60 per week.
If the starting amount is greater than the maximum rate, that amount will be protected but no further state pension can be built up, even though NI contributions will continue for those with earned income.
Pre 6 April 2016 entitlement exceeds the notional nSP entitlement, both less than £168.60 per week.
The starting amount is equal to their pre 6 April 2016 entitlement, and a further £4.82 per week may be earned for each future year of National Insurance payments, up to a maximum of £168.60 per week.
Current entitlement is less than the notional nSP entitlement, both less than £168.60 per week.
The starting amount is set to the notional amount they would have earned if nSP had already been in place. A further £4.82 per week may be earned for each future year of National Insurance payments, up to a maximum of £168.60 per week.
Starting amount is greater than £168.60 per week.
The starting amount is equal to their pre 6 April 2016 entitlement, however, no further entitlement can be earned. The individual will receive the foundation amount plus any increases/uprating for inflation.
Married women who chose to pay lower National Insurance and rely on their husbands NI record instead are still able to claim pension benefits on his record, even following a divorce.
Until 5 April 2017 it was possible to purchase NI credits to make up for a broken NI contribution record.
These measures ensure that not only are existing benefits protected, but the result is simpler to calculate.
Department of Work & Pensions have produced a number of new State Pension factsheets.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.