Over 60

New State Pension

Things are changing.

What is the Difference between the Old and the New UK State Pension?

The introduction of a new pension scheme was influenced by various factors which were considered as based on the wellbeing of the UK pensioners. The change in the pension system will see a rise of funds paid to new retirees to £155.65 a week, while the current pensioners will have an increment by £3.35 to £199.30. The difference between the old and the new pension schemes will be £36.35 per week, or a significant £1,900 a year.

Why is a new State Pension needed?

The idea behind introducing a new pension system is to simplify the rather elaborate scheme initially in use and increase the benefits to the pensioners. The old State Pension seemed to discriminate on gender equality and had high levels of means-testing. The government saw the need to revise this factor as men were receiving a higher State Pension than women. The new State Pension would be simplified to make it easier for pensioners to have a clear picture of their pension amount and help them plan for their retirement savings.

With the full introduction of the new State Pension, some significant changes will be distinct from the old system.

How the new State Pension works

The new State Pension is influenced by individual’s National Insurance records. People with no National Insurance record by the time the new State Pension is introduced will have to wait for 35 years to qualify for the full amount of the new scheme on reaching the pensionable age. Your new State Pension will be calculated based on the amount contributed towards the National Insurance, which may vary depending on individual’s insurance plan. The new rules will ensure that pensioners do not get a lesser amount than they did on the old systems, provided that the minimum qualifying period is achieved.
Will you qualify?
To get any State Pension, you will typically need at least 10 ‘qualifying years’ for the new system on your National Insurance record. The years can be after or from before the inaction of the new scheme on 6 April 2016, and the years need not be successive. Although the amount you will receive as your pension is dependent on your National Insurance record, there will be some instances where people will be considered to receive some State Pension through their civil partner or spouse.

What if are already getting more than the full State Pension?

Under the old State Pension scheme, of you were not self-employed but rather employed, you were entitled to both Basic State Pension and an Additional State Pension and would pay Class 1 National Insurance. The National Insurance contributions you were credited with or made and your salary were used to determine the Additional State Pension. If you have developed a considerable right to Additional State Pension, this might mean that under the old scheme you have already earned a pension which is more than £159.55 per week. You are entitled to the full new State Pension amount if you fall under this category and you will keep ‘protected payment,’ which is any amount above this and meant to increase by inflation. However, you will not be in a position to create any more State Pension after April 2016. You will also receive the full new State Pension if your starting amount is equal to the full new State Pension.

Deferred new State Pension

You can still delay taking your State Pension in the new system just like in the old scheme. You will get about 5.8% increase in your State Pension for every year you defer compared to the previous system which stood at 10.4%. The new State Pension, however, does not allow you take the deferred amount as a lump sum. Some benefits do not attract an increase even after deferring, and it is, therefore, advisable to check whether is applies to you.

Widow’s and married women reduced-rate National Insurance contributions

The new State Pension is calculated based entirely on your National Insurance contributions. In some circumstances, it can be worked out based on different rules and give you a higher rate if you chose to pay “the married woman’s stamp” or married women and widow’s reduced-rate National Insurance contributions. Married women or widows who have made the choice of paying reduced-rate National Insurance contributions might receive new State Pension determined by various rules which would give her more than the amount of the new State Pension if it were calculated using her own National Insurance record. The woman will, therefore, not need ten qualifying years of her own where these rules apply to get any State Pension. She will get a State Pension approximately the same as:
i) The lower rate of 73.30 a week basic State Pension 2017/18 if the woman is married and her spouse has reached State Pension age.
ii) The rate of £122.30 per week primary state Pension 2017/18 if divorced or widowed.
The woman is entitled to any Additional State Pension on top of this necessary amount she built up before 6 April 2016. For her to qualify, before she reaches State Pension age, her Reduced Rate Election must have been functional at the start of a 35-year period which ended on 5 April 2016.

Inheriting wife’s, husband’s or civil partner’s State Pension

It is possible for you to inherit an extra amount of top of the new scheme if you are a surviving civil partner or widowed. The additional amount paid may consist of protected payment or Additional State Pension and will depend on whether the deceased:
i) Had died before 6 April 2016 or reached State Pension age
ii) Died under State Pension age after 5 April 2016 or reached State Pension age.

Topping your State Pension

It is possible to make Class 3 National Insurance contributions if you have not attained State Pension Age and you are concerned that you might not have enough National Insurance record to get the maximum amount or qualify for State Pension. These contributions are not mandatory and serve as a development where people can improve their basic Pension entitlement by filling gaps. National Insurance gaps are influenced by various factors and may be unavoidable in some instances like:
i) If you are living abroad
ii) Employed but with a low income of less than £113 a week in 2017/2018
iii) Not employed and no claim of benefits
iv) Not paying National Insurance when you are self-employed due to small returns
You might not have a gap if you were claiming benefits, which includes Child Benefit for children under 12 or 17 years before 2010, despite not having been paying National Insurance contributions as you may have been getting credits.

In cases when you do not have gaps in your National Insurance records, then no action is required. It is also possible under different circumstances to get the full State Pension even with gaps in your National Insurance credits.

If you are not building your National Insurance record through receiving credits or employment, you can protect your National Insurance records through voluntary National Insurance contributions. There has been an extension by HMRC to the usual deadline for the tax years 2006 to 2007 to 2015 to 2016 for making voluntary National Insurance. The new State Pension allows people to make contributions until 5 April 2013.

New State Pension for self-employed people

For the individuals who have been self-employed in the past or currently, you make Class 2 National Insurance contributions if in year 2017/18 your profits are above £6,025. Where your profits rise above £8,164 in 2017/18, you pay both Class 2 and Class 4. With effect from 6 April 2016, National Insurance contributions made in Class 2 by self-employed people counted towards the new State Pension and treated the same way as employee contributions, including contributions carried out before 6 April 2016 for individuals in Class 2.
Contracted-out people
State Pension under the old scheme was made of two categories: the basic and the Additional State Pension. The additional State Pension is also referred to as SERPS or State Second Pensions. If you were in any pension system at the workplace before April 2012, or you are or were in a ‘Defined Benefit’ pension system which is usually a salary-based or final salary scheme, there is a possibility that you have been contracted out of SERPS. Some personal and stakeholders were also contracted out.

For people contracted-out before 6 April 2016 from the Additional State Pension, deductions have been made while working out the new State Pension. The deduction was validated based on the old and State Pension rules to determine the possible starting amounts. This criterion is used since, depending on the type of an individual’s pension scheme: i) Some of the National Insurance contributions contributed to personal or stakeholder pension after paying them instead of the Additional State Pension, or ii) You would have paid at a lower rate to the National Insurance contributions. These contracting-out rules have since been abolished from 6 April 2016.

Further reading:

1) Department of Work and Pensions
2) thisismoney.co.uk
3) The Daily Telegraph
4) AgeUK
5) moneyadviceservices.co.uk
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