The new State Pension - how does it affect me?


Since April 2016, a new State Pension has been in place, claiming to provide 'a fairer system for all'. But one thing that seems to have sent people into a spin is a fairly obvious question:

How much will I be entitled to?

The answer is there’s no simple answer – there are a few complex factors involved, so each individual case will be different. It is worth taking the time to find out exactly what you are entitled to, as it may affect any decisions you make about how you are going to spend your retirement savings.

However, there’s no need to worry

If you have reached State Pension age on or after 6 April 2016, you will never receive less than those who reached the State Pension age before this date. But there are still some differences to keep in mind: 

Key features of the old State Pension system

If you reached State Pension age before 6 April 2016...
  • Payment of £122.30 per week (known as the Basic State Pension)
  • For full Basic State Pension you must have contributed to National Insurance (NI) for at least 30 years
  • Increases by at least 2.5% each year
  • Separate entitlement to an Additional State Pension (also known as SERPS/S2P) unless you contracted out of it
  • Additional State Pension increases every year with inflation.

 

Key features of the new State Pension system

If you reached State Pension age on or after 6 April 2016...
  • Affects men born on or after 6 April 1951 and women born on or after 6 April 1953
  • New full single-tier pension payment of £159.55 per week
  • Normally need to have contributed to NI for a minimum of 10 years to get any State Pension
  • For full State Pension you must have contributed for at least 35 years
  • Deductions made from total pension for those who have ‘contracted out’.

 

So what’s changed?

As mentioned before, the full new State Pension pays out £159.55 a week if you reached State Pension age on or after 6 April 2016. But it’s important to note that this figure is a guideline – the actual amount that you get will depend on how much National Insurance (NI) you’ve paid over your working life.

What this means is that an adjustment will be made to your new State Pension if you ‘contracted out’ at any time before April 2016. This might mean that you:

  • paid lower NI contributions (for instance by contracting out of certain workplace pensions)

    OR

  • received a NI rebate into a personal or stakeholder pension (a different way to contract out).

In either case an amount will be deducted from your weekly new State Pension payments to reflect that you have benefited elsewhere.

How do I know if I contracted out?

Don’t worry. If you aren’t sure whether you contracted out, when you contracted out or how many years you contracted out for, the Government will have a record of all of this. They will provide you with all of this information when you apply for a State Pension statement. You can read more about this under ‘How can I find out what I will receive?’

So how is the amount that I’ll receive worked out?

Roughly speaking, the new State Pension is calculated by multiplying the full rate (£159.55) by the number of NI qualifying years that you have paid…

£159.55 x number of NI qualifying years

…and then dividing this amount by 35 (to represent the full qualifying years):

(£159.55 x number of NI qualifying years) ÷ 35 = your weekly payments

However, there’s a second stage to the calculations. You may also have some of the total deducted for contracting out (called a ‘rebate derived amount’). This is a complicated system – mainly because the rules around contracting out have changed so much over the years.

Still unsure? Here’s an example:

Say you have made NI contributions for 30 years. However, the Department for Work and Pensions (DWP) has also worked out that your ‘rebate derived amount’ will cost you deductions of £6.32 a week. Based on these factors your new State Pension amount will be worked out as follows:

Step 1 – £159.55 x 30 ÷ 35 = £136.76

Step 2 – £136.76 – £6.32 = £130.44

So overall, your weekly payments will be £130.44 – that’s £29.11 less than the full amount each week.

How can I find out what I will receive?

This is important. You will not automatically be sent a statement telling you what you are entitled to, but you can request a statement from the DWP.

If you are over the age of 50 you can do this by calling 0345 300 0168 and the DWP will send you a BR19 form that you can fill out and send back.

Alternatively, you can fill in the form online, which asks for personal information about

  • who you are,
  • where you live,
  • your marital status, and
  • whether you have ever lived outside of the UK.

As with all forms, you’ll need to expect a processing time before you receive your State Pension statement back.

Regardless of whether you requested a statement or not, four months before you reach State Pension age you’ll receive a letter from the DWP asking you if you would like to claim your State Pension or defer (delay) receiving it.

Is there anything I can do to top up my NI contributions?

Yes – if you know that you have gaps in your NI contributions you can make up the difference by using what are called Class 3 contributions. It’s worth checking if you are eligible though by reading the information here.

If you are close to the State Pension age and don’t have enough qualifying years, it’s certainly worth finding out more. Especially if you know that you are going to rely on the State Pension during retirement.