New State Pension

For people reaching state pension age since 2016

state pension

The state pension saw a big change in 2016, affecting people retiring since then. While the Government's aim has been to make the system fairer for all and easier to understand, it can still be a minefield – and some people have lost out from the overhaul.

In this guide

This is the first incarnation of this guide. Please suggest any changes or questions in the New State Pension discussion. Thanks to Alan Higham formerly of PensionsChamp and Danny Cox of Hargreaves Lansdown for fact-checking and their help putting the guide together.

What is the state pension now?

The new 'flat-rate' state pension was ushered in on 6 April 2016. While the overhaul was designed to make the system easier to understand, it's still far from simple.

The new pension only applies to those reaching state pension age on or after 6 April 2016. This means millions of older people aren't affected by it and have simply carried on receiving their state pension under the old system.

Here are the key differences at a glance (and remember there's no married couple's pension – each individual has their own entitlement)... 

TABLE_CELL_STYLE OLD STATE PENSION NEW STATE PENSION
How it's made up Two parts: basic pension + additional pension One flat-rate payment + any 'protected payments'
Maximum weekly payout £129.20 basic (+ avg £40 additional) £168.60 + any 'protected payments'
NI years needed for full rate 30 35
NI years to qualify for minimum payment Any 10

When will it be paid to me?

As with the old system, you receive the new state pension when you reach the Government's official retirement age. What that is depends on when you were born.

To cut costs, the official retirement age is gradually being raised. It is increasing to 66 for men and women by April 2020, then to 67 by 2029, with a further rise to 68 due between 2037 and 2039.

The rising pension age for women has triggered much controversy – previously it was just 60. Campaign group WASPI – Women Against State Pension Inequality – has fought against the pace of change in women's state pension age. But campaigners lost a legal fight against the government recently.  

State pension age for men and women

TABLE_CELL_STYLE BORN OFFICIAL RETIREMENT AGE
Men Before 6 December 1953 65
  On or after 6 December 1953 Rises from 65 to 66 between December 2018 and April 2020.
Women Before 6 April 1950 60
  On or after 6 April 1950 Rises from 65 to 66 between December 2018 and April 2020.

To find your exact retirement age, see the Government's State Pension Age Calculator.

How to claim it

While it might feel like an official life milestone, you won't get your state pension automatically – it's up to you to claim it. No later than two months before you reach your state pension age you should get a letter from the Government's Pension Service telling you what to do.

If you don't receive a letter, call the telephone claim line where staff will be able to discuss with you what you need to do.

You've three ways to claim: by filling in a claim form online, by calling 0800 731 7898 or by downloading a claim form from Gov.uk and sending it to your local pension centre whose address can be found on the Government website.

How much state pension will I get?

What you get depends on how many so-called 'qualifying years' of national insurance (NI) contributions you have. These are earned over your lifetime and how many you get generally depends on how many years you're in work.

You can also build them up as NI credits for time spent raising a family, if you care for someone who is sick or has a disability, or have been enrolled in full-time training.

Here's what you need...

To get any state pension at all

Under the new state pension rules that came in on 6 April 2016, you need a minimum of 10 years before you'll get any payment at all. Reach this and you'll be paid 10/35ths of the total – currently £168.60 – which is about £48 a week. These qualifying years can be from before or after 6 April 2016 and don't have to be 10 years in a row – they can be dotted about over a much longer period.

However, if you don't meet this 10-year minimum, you won't get a penny (although pension credit should be available). Under the old system, there was no minimum – you could still get a small payout even if you had just a few years of NI contributions.

To get the full £168.60

You'll need 35 years to get the full £168.60 rate (which itself rises each year by 2.5%, inflation or average wage growth – whichever is highest). Crucially, you don't have to start from scratch from 6 April 2016 – any qualifying years earned before this date will count along with subsequent years.

And some people can get more. Under the old state pension rules, workers were able to build up what's known as the additional state pension (also called the second state pension, S2P, or SERPS) – a top-up to the former basic state pension. Although the new rules have now scrapped this top-up, the Government has allowed many workers in their 40s, 50s and early-60s to keep their existing entitlement.

This is part of the Government's pledge that people who worked to build up a healthy state pension under the old rules shouldn't lose out under the new one.

To make it work – and it is fiendishly complicated – what you'll get depends on a so-called 'starting sum' calculation. This compares what you'd have been entitled to under the old and new regimes – and, in a nutshell, you'll get the higher of the two.

This extra money is known as your 'protected payment' and will be highlighted on your state pension statement.

To get somewhere in between

You'll get the equivalent value of the state pension according to the total number of years you've built up – so 23 years would give you roughly two-thirds of the current £168.60 payout, or about £111.

As a guide to what you might get, multiply the number of years you've got by £4.80 – this figure is what each qualifying year is roughly worth.

There's a potential catch, though. Some years in which you paid NI don't count when working out how much you're entitled to because they're not deemed 'full' years. This could mean you end up with less than you imagined (see 'contracting out' below).

Quick question

What are qualifying NI years – and how do I find out how many I've got?

For a qualifying year, you generally need to earn a minimum amount of money during a tax year (6 April to 5 April) and pay the required NI contributions. For 2019/20 these minimums are:

  • £118/week, £512/month, £6,136/year for employees
  • £123/week, £531/month, £6,365/year for the self-employed

If you work full-time, even on the minimum wage or just a few days a week throughout the year, you are likely to earn a qualifying year. And, to reiterate, these qualifying years can be from before or after 6 April 2016 and don't have to be consecutive – they can be dotted about over a much longer period.

Remember too that you'll need at least 10 qualifying years to be eligible for any payout at all.

Does it matter if I don't have a job?

If you're unable to work – for example due to long-term illness or you're caring for someone – you may be able to get NI credits. With some benefits, such as child benefit for a child under 12, jobseeker's allowance, and employment and support allowance, you get NI credits automatically.

There are some instances where it isn't done automatically and you have to apply; for example if you care for someone for at least 20 hours a week, you may be able to apply for carer's credit.

You can check if you're eligible for credits, but you need to wait until a tax year ends on 5 April before you can apply for credits for the previous 12 months.

Warning: More than 200,000 stay-at-home parents or carers of under-12s risk losing some of their state pension because it's their earning partner who's registered for child benefit. Even if your partner's bringing in £50,000 or more a year, the threshold where child benefit starts to reduce on a sliding scale, the non-earner is still entitled to NI credits – so make sure the right person is registered. You can also transfer NI credits from from one partner to another to boost your state pension. 

Where can I check how many NI years I have?

HM Revenue & Customs may write to you if you have a gap in your NI contributions.

And you can check the situation for yourself by going to the Government's website or phoning the national insurance helpline on 0300 200 3500.

Ask it:

Which years have you got me down as paying national insurance?

Those NI contributions or credits on your record under the old state pension will still count towards your new state pension – you don't have to start from scratch with your contributions under the new system. For more on NI contributions, see the Q&As below.

Why 'contracting out' will cut your state pension payout

It's estimated that less than half of people retiring in the first few years of the new system will be eligible for the full flat-rate sum. This is mainly due to the numbers of people who won't have enough qualifying NI years because they've been 'contracted out' of the state pension in the past.

Contracting out isn't simple...

Under the old system, the state pension was made up of two parts:

  • The basic state pension, and
  • Additional state pension, sometimes referred to as state second pension or SERPS (State Earnings-Related Pension Scheme).

If you are or were in a defined benefit company pension scheme – where the amount you're paid in retirement is a set proportion of your final salary – you're likely to have been 'contracted out' of the additional state pension.

In a nutshell, it meant workers paid a lower rate of NI contributions. This was because – in return – they would have paid this extra cash into their workplace scheme, or had it paid in for them by their employer. Millions of workers with company pensions in the public and private sectors are affected. Many individuals also contracted out through personal pensions. 

You need 35 FULL years to qualify for a £168.60 pension...

This means you won't get £168.60 despite having what you thought were 35 years of NI contributions. What counts is 35 years of full contributions – not ones where you paid a lower NI rate.

To this end, the Government will deduct a sum from your new state pension. It says that although you'll get less than the full £168.60, retirees will still be paid what they would have got under the old state pension.

The sum is what the Government has coined your 'contracted out pension equivalent' (COPE) amount. If you ask for a state pension statement from the Government it will include this amount.

However, while many people will get a private pension boost which offsets this deduction, it could be less than the state pension they gave up – much depends on the pension scheme and investment performance. To make matters worse, many workers won't even have realised they were contracted out, so will learn of their lower pension as a shock.

Quick questions

  • So-called 'contracting out' saw staff agree to give up their right to additional state pension.

    The idea was that in return for doing so, you (and your employer) would pay a lower level of NI, giving you a bigger pay packet.

    On top of this, your private pension provider would then boost your retirement fund with an extra bit of cash.

    Behind it all lay a desire to cut the state's pension bill.

    If it could persuade workers to give up their right to the additional state pension – 'contracting out' – the Government could make huge savings and let private companies take the strain instead.

    In theory, the worker would benefit from having the extra cash invested in the stock market which then went towards paying them an income when they retired.

  • You may have to dig out old payslips or P60s. If you were contracted out via a personal pension, you'll need to get your pension provider to confirm. You can check with your pension provider if you've been contracted out in the past. The Pension Tracing Service may be able to find your pension providers' details if you've lost contact with them.

    You're more likely to have been contracted out if you work in public sector organisations and professions such as:

    • The armed forces
    • Civil service
    • Councils
    • Fire service
    • The NHS
    • Police
    • Teaching

How can I boost my state pension?

Regardless of whether you're under the old or new state pension system, there are ways you can boost the amount of state pension you'll receive. However, they need to be considered carefully.

Defer your state pension

You can put off claiming – 'defer' – your basic state pension. This can be useful if you're still working, as it means you could get larger pension payments later. Unless you claim your pension, it will automatically be deferred.    

How much extra can I get?

For someone reaching state pension age after April 2016, every nine weeks you defer boosts your weekly state pension by 1%. If you hold off taking your state pension for 12 months, this works out as a 5.8% boost.

For someone entitled to the full £168.60 flat-rate pension, deferring by a year means they'll then get an extra £9.74 a week (about £507 a year). The extra amount is paid with your regular state pension payment. 

Should I defer my state pension? 

If you are still working at state pension age, or have other retirement income such as a company pension, deferring the state pension might seem a good idea.

However, you need to balance the prospect of a bigger state pension in the future against giving up £1,000s of pension income in the short term. 

When you eventually start drawing your deferred (larger) state pension, it will be years before you make up for the foregone payouts. The 'break even' point has been calculated as 17 years from when you start drawing your deferred state pension.   

The longer you live, the more you stand to benefit from deferring. Equally, unless you live to a good age in retirement, deferring will cost you overall. 

Also, drawing your extra state pension may reduce the amount you get from state benefits such as pension credit, housing benefit and council tax reduction.    

Buy 'extra' pension years

If you've got spare savings and can afford to be without the cash in the short term, it's also possible to replace some missing NI qualifying years.

This could lead to a big increase in your basic state pension payout over your retirement.

In a nutshell, you pay a one-off lump sum to buy a higher state pension sum. Assuming you live long enough, the extra cash you earn from a bigger weekly state pension could be worth £1,000s over a lifetime.

But before you boost your state pension, double-check it's worthwhile because – as always with pensions – there are some tricky rules. 

The key that defines whether it's worth bothering is how many NI years you already have (remember that under the new state pension you need 35 qualifying years for a full-rate payout). You can check online whether you have any gaps in your NI record by getting a state pension statement or calling the Government's Future Pension Centre on 0845 3000 168 and it'll send you a statement.

Quick questions

  • If you're eligible, and you could benefit by boosting, buying extra years involves paying what are called 'voluntary class 3 NI contributions'. 

    Those retiring after 6 April 2016 can buy up to 10 years' contributions. 

    The rate is £15 per missing week of NI contributions – £780 for a full year.

  • There are some who may not be able to, or shouldn't, buy additional years.

    • Paid reduced NI? Married women sometimes paid less NI (known as the 'small stamp' or 'married woman's stamp') in return for some maternity benefits. But those who signed up to this can't replace any missing years where they paid reduced NI for the whole year.

    • Already at the maximum number of years? If you try to buy further years that would take you over the maximum number allowed, you'll normally be prevented from doing so by the Government.

  • Whether it's a good idea will depend on whether you can afford to give up the cash needed to buy the extra years and whether you are likely to live long enough to make it worthwhile. 

    Buying a full extra year for £780 will boost your pension by £4.80 a week, equivalent to about £250 a year.  

    So if you buy one extra year you'll earn back what you paid in just over three years.

     

Check if you can get pension credit before paying extra

If you don't have enough money to buy additional NI years to get the full state pension, your payout may be boosted if you apply for pension credit.

Pension credit is an income-related benefit for low earners who don't qualify for the full basic flat-rate of £168.60 a week.  

If you're eligible for pension credit you'll still be entitled to other benefits such as housing benefit. See our Pension credit guide for full information.

New state pension Q&A

  • The Government said the old state pension was hard to understand and unfairly biased against many – notably women – who took time off work to care for others or raise a family.

    Problems lie in the old system being made up of two parts: a 'basic' state pension (worked out according to your number of national insurance years) and a 'second state pension', also known as S2P, SERPS or the additional rate.

    While the first part was simple enough, the latter caused huge problems with its complexity – particularly when workers opted out of it (knowingly or otherwise) in a process called 'contracting out', which has left many out of pocket.

    The new payout was designed to make the whole process easier to understand, though it's still far from simple.

    The new set-up is also a huge boost for the self-employed who lost out hugely under the old system since they were unable to build up any second state pension.

    However, the new state pension is only for those reaching state pension age on or after 6 April 2016. This means millions of older people are unaffected and carry on receiving their state pension under the old system.

  • No. Having more than 35 qualifying NI years doesn't boost how much state pension you receive. The only way you may get more is if your 'starting sum' under the new rules is higher than the maximum £168.60 pension.

  • Yes and no. Under the flat-rate state pension, class 2 NI contributions made by self-employed people who make a profit above £6,365 (in 2019/20), and class 2 and class 4 NI contributions for those with a profit above £8,632 (in 2019/20), will be treated the same as employee contributions and count towards the new state pension in the same way. This will include any contributions made before 6 April 2016.

    Self-employed people are the big winners in the new state pension. Under the old rules if you were self-employed you weren't included in the additional pension, so the most you could have got was £129.20, now you can get £168.60 – a massive boost.

  • Yes, you can, as long as you've paid enough UK national insurance (minimum 10 years) to qualify. If you've paid into a social security system overseas that has a dual agreement with the UK, or is in the EU, then those years can count towards the 10 years.

    For example, if you have five years in the UK and five years in Portugal, then you'd get 5/35ths of the UK state pension. This is because the two periods combine to give 10 years, which meets the qualification, but only the five years in the UK actually count towards the amount. If you're unsure how many years you have you can ask for a state pension statement.

    To claim, you need to be within four months and four days of your state pension age. You'll also need to contact the International Pension Centre. If you live part of the year abroad you have to choose which country you want your pension to be paid in. You can't be paid in one country for part of the year and another for the rest of the year.

    You'll be paid in local currency – the amount you get may change due to exchange rates – and you can choose to be paid every four or 13 weeks. If your state pension is under £5 a week, you'll be paid once a year in December.

    Of course, Brexit might have an impact on some of the above. 

    It's also worth noting, if you live abroad in certain countries your UK state pension will be frozen, so there are no increases.

  • Your state pension will be calculated entirely under the new state pension rules. This is more likely to affect you if you were born after the year 2000, or became a resident of the UK after 2015.

  • Yes. Like the old state pension, the headline rate will rise with the so-called triple lock.

    This goes up every April by the biggest of the following: inflation in the previous September (using the Consumer Prices Index), the increase in average earnings, or 2.5%.

    However, for those who will receive more than the £168.60 rate, the extra 'protected' income is to rise only by inflation.

  • Although your entitlement to the new state pension is based on your national insurance contributions alone, there are some circumstances where you can inherit parts of your spouse or civil partner's pension. What you get depends on different factors, such as:

    • The number of years they've paid national insurance. Essentially, the longer they've worked, the more you're likely to get, as there's the potential they have accrued more.
    • Whether your deceased spouse or civil partner had any additional state pension, protected payment, state pension top-up or 'graduated retirement benefit' (the earnings-related state pension people could build up between 1961 and 1975). If so, you could get more as there's more to pass on.

    Working out exactly how much you're entitled to is complex. The Department for Work and Pensions' online tool allows you to see what you may get if your spouse or civil partner dies, based on your own circumstances.

    If you reached state pension age and got married before 6 April 2016 and are therefore receiving your state pension under the old pension rules, it's different. See our Old State Pension guide for more.

SPOTTED OUT OF DATE INFO/BROKEN LINKS? EMAIL: BROKENLINK@MONEYSAVINGEXPERT.COM