State Pension

The State Pension changed on 6 April 2016. If you reached State Pension age on or after that date, you’ll get the new State Pension under the new rules.

The new State Pension is designed to be simpler than the old system, but there are some complicated changeover arrangements which you need to know about if you’ve already made contributions under the old system.

Already reviewing a State Pension

If you were already reviewing a State Pension before 6 April 2016, you’ll continue to receive your State Pension under the old rules.

However, if you’re a woman born before 6 April 1953 or a man born before 6 April 1951, your State Pension will be paid under the old system. Even if you deferred your State Pension to a date after 6 April 2016, it will still be calculated under the old system.

State Pension under the old system

Women born on or after 6 April 1953 or men born on or after 6 April 1951 will receive the new State Pension. If someone has already started to build up a State Pension under the old system, this will be converted into an amount under the new State Pension.

If they hadn’t built up any State Pension by 6 April 2016, their State Pension will be completely calculated under the new rules.

Changes to the State Pension

The earnings-related part of the old system which applied to employed people – called the ‘Additional State Pension’ – is abolished.

The new State Pension is based on your National Insurance (NI) record alone. For the current tax year, the new State Pension is £159.55 per week. However, someone may receive more than this if they have built up entitlement to Additional State Pension under the old system – or less than this if they were ‘contracted out’ of the Additional State Pension. To be eligible for the full £159.55 per week, someone will need 35 years’ NI record.

‘Starting amount’ under the new State Pension

The new State Pension is calculated from your NI record as at 6 April 2016, converted into a ‘starting amount’ under the new State Pension. This won’t be lower than the amount you would have received under the old system.

Under the old system, if you were employed (rather than self-employed), you paid Class 1 National Insurance which entitled you to the Basic State Pension and an Additional State Pension. The Additional State Pension was based on your earnings as well as the National Insurance contributions you had made or been credited with.

Substantial entitlement to Additional State Pension

If you had built up substantial entitlement to Additional State Pension, this might mean that you have already earned a pension under the old system which is worth more than £159.55 a week. If this applies to you, you will get the full new State Pension amount, and you’ll also keep any amount above this as a ‘protected payment’ which will increase by inflation. However, you won’t be able to build up any more State Pension after April 2016.

If your starting amount is equal to the full new State Pension, you’ll receive the full new State Pension amount. You won’t be able to build up any more State Pension after April 2016.

If your starting amount is lower than the full new State Pension, this might be because you were ‘contracted out’ of the Additional State Pension. You can continue to build up your State Pension to the maximum (currently £159.55 per week) up until you reach State Pension age.

You can do this even if you already have 35 years of NI contributions or credits.

Less than 35 years of NI

• To receive the full amount, you’ll need to have 35 years’ worth of NI contributions or credits (known as ‘qualifying years’) during your working life. These don’t have to be consecutive years
• If you have less than 35 years of NI contributions or credits, you’ll receive an amount based on the number of years you have paid or been credited with NI
• If you have less than ten years, you won’t normally qualify for any State Pension
• However, the ten-year minimum qualifying period does not apply to certain women who paid married women and widow’s reduced-rate National Insurance contributions
• If you have gained qualifying years in the European Economic Area, Switzerland or certain bilateral countries which has a social security agreement with the UK, these can be used towards achieving the minimum qualifying period. However, the actual UK State Pension award will normally be based on just the UK qualifying years

Deferring the new State Pension

You’ll still be able to defer taking your State Pension. For each year you defer, you’ll receive just under a 5.8% increase in your State Pension (compared to 10.4% under the old system). You cannot take the deferred amount as a lump sum.

The new State Pension is normally based on your own NI contributions alone, but you may be able to have your State Pension worked out using different rules that could give you a higher rate if you chose to pay married women and widow’s reduced-rate NI contributions (sometimes called the ‘married woman’s stamp’).

Not enough NI record to qualify for State Pension

If you have not yet reached State Pension Age but are worried that you might not have enough NI record to qualify for State Pension (or to receive the maximum amount), you can make Class 3 National Insurance contributions. These contributions are voluntary and allow people to fill gaps in their record to improve their basic State Pension entitlement.

You should regularly request a State Pension statement so that you can see how much State Pension you’ve built up so far.

Financial freedom to fulfil your dreams

Retirement should be one of the most enjoyable and fulfilling stages of your life. It should offer exciting new opportunities and the financial freedom to fulfil your dreams – if you have planned well enough in advance. To discuss your situation, please contact Kubera Wealth on 0208 8868 8886 or email info@kuberawealth.co.uk – we look forward to hearing from you.