The state pension - everything you need to know

The state pension forms a big part of lots of people’s retirement plans, with the income form it helping to bolster any income from personal or company pensions. But with the age being extended and worries about the rising cost of it for the Government, there are concerns it could be trimmed back.

For those nearing retirement it’s important to know all the details about the state pension so they can know when they are entitled to it, how much they will receive and any pitfalls to watch out for.

Why does the state pension exist?

The main objective of the UK state pension system is to reduce poverty in old age, with a flat rate pension intended to reduce the reliance on means-tested benefits. 

The Basic State Pension was introduced in 1948 as a pay-as-you-go system. Individuals paid National Insurance contributions related to what was needed to fund the benefits of current pensioners. We still see misconceptions today about how people have ‘funded’ their State Pension or are ‘owed money’, when in fact the system is a flat rate benefit.

In 1961 an earnings element was introduced, often referred to as an ‘additional state pension’ for employed people. It’s taken different forms over the years – from the Graduated Retirement Benefit, to SERPS and then the state second pension. Not all employees would’ve got it though – due to something known as being ‘contracted out’.

Anyone reaching state pension age on or after 6 April 2016 receives what is known as the ‘new’ State Pension. This overhaul was designed to simplify the system and get back to people building up their own pension benefit, rather than the reliance on spouses and civil partners that was a feature of the older regimes.

What is the state pension age?

The current UK state pension age is 66 for both men and women. There are changes coming that mean people born after 5 April 1960 will see a phased increase to age 67, and anyone born after 5 April 1977 will see a rise to 68. You can see what your state pension age will be here: Check your State Pension age here.

You can retire before or after the State Pension age though, you just won’t have that income to rely on. But the age you can access your own pension pots is currently 55, rising to 57 from 6 April 2028.

How much is the state pension?

The full (new) State Pension is currently £221.20 a week, equivalent to £11,502.40 a year. It’s paid every four weeks in arrears, and although it’s paid without any tax deducted it does count towards your total taxable income.

You might get a higher State Pension than the full amount above if you’d built up an entitlement to the additional State Pension mentioned above under the old system but hadn’t reached State Pension age by 6 April 2016. You’ll see this extra amount on a statement marked as a ‘protected amount’.

You’ll have to claim your state pension though – it doesn’t start automatically when you reach your state pension age. You can defer taking your state pension – if you go without it for at least nine weeks then you’ll get an extra 1%. This works out as an extra 5.8% if you defer for a whole year. It’s usually only a good deal if you’re in good health and are still working beyond state pension age.

Can I inherit the state pension?

Under the new system, you don’t usually inherit any state pension. But you can inherit 50% of your late spouse or civil partner’s protected payment in addition to your own weekly state pension if you were married or in a civil partnership before 6 April 2016.

There are different rules if one or both of you reached State Pension age before 6 April 2016.

How to get a state pension forecast

A state pension forecast will show your pension age and a forecast amount based on your National Insurance record to date and another based on continuing contributions. There will also be information on your qualifying years and any missing years. You can get a forecast online or by completing a form BR19 in the post.

If you have gaps on your record or years where you haven’t made the full contribution needed, you might be able to plug these and get closer to the 35 full, qualifying years you need. Firstly, check if you’re eligible for National Insurance credits. You could be eligible if you can’t work, are unemployed or caring for someone full-time. You might also be able to ‘top up’ your record by paying voluntary National Insurance contributions. You can find out more by contacting the Future Pension Centre.

Does the state pension increase each year?

The flat rate state pension is usually increased in April each year in line with the ‘triple lock’. This provides an increase of the higher of:

• Average increase in prices (based on the CPI measure of inflation)
• Average increase in earnings
• 2.5%

What if I move abroad to retire?

If you move to an EEA country, the US or a list of other countries including Israel, Mauritius and the Philippines, your state pension will still increase each year. But there are more than 100 countries worldwide where the UK basic state pension is not uprated each year. These include Canada, Australia and New Zealand.

These articles are for information purposes only and are not a personal recommendation or advice. Pension and tax rules apply. If you need help with tax or your investments, it’s a good idea to get professional, regulated advice.