Still Confused About Pensions?

I was surprised a couple of months ago at how many people e-mailed and wrote to me about their retirement pension after I mentioned briefly the rules for working out how much we all get. So if you have not yet claimed your retirement pension – or if you have and you wonder if it is correct – here is my cut-out-and-keep guide to the state retirement pension.

When do I get it?
The youngest age to claim your retirement pension is 65 for a man and 60 for a woman. However, the pension age for women will rise to 65 between 2010 and 2020. Women born before April 6 1950 will still be able to claim their pension at 60. Those born on April 6 1955 or later will have to wait until they are 65. Women born between those two dates will have a pension age between 60 and 65.

Even when you reach pension age you can wait for up to five years before you claim it. By waiting you earn a higher pension. It is increased by 1 per cent more for each seven weeks of delay. So a year’s delay will increase your pension by nearly 7.5% and the full five year delay adds just over 37% to the pension. You will not get an increment if you are claiming another similar benefit – such as invalid care allowance – instead. From April 2010 these increases will be more generous – 1 per cent for each five weeks’ delay and there will be no five-year limit to the time you can postpone receiving your pension.

Who gets it?
If you have worked and paid full National Insurance contributions you should get some retirement pension when you reach pension age. The amount you get depends on how many contributions you have paid. The first thing to count is the length of your working life. For people retiring now it begins at 16 and so is normally 49 years for a man and 44 years for a woman. To get a full pension a man needs 44 years of contributions and woman 39 years, in other words five years less than the working life. Only full National Insurance contributions count – the reduced married woman's contributions do NOT count towards a pension.

Sometimes even if you do not pay contributions at work, you can be credited with them.

· Men get credits for the tax year they reach 60 and the four subsequent years if they need them. That concession will be extended to women when their pension age is raised from 2010.

· People get a credit for years when they get incapacity benefit, invalid care allowance, maternity benefit or pay, the new working families tax credit or disabled person’s tax credit. Some self-employed people on very low earnings and people claiming benefit as unemployed also get credits.

· Credits were given for the time you were at school between the ages of 16 and 18. No credits are given are given for time at university.

Contributions paid before April 1975 were flat-rate and paid weekly. They are converted into years by dividing by 50 (not 52) and rounding up. And if you were born before July 1932 and worked before July 1948 then you will be given some credits for that period.

The number of years for which you have paid contributions or been given credits are added together and then divided by 39 for a woman or 44 for a man and the answer rounded up to the nearest whole percent. So a man who has contributions for 30 years will get 30/44ths of a full pension, which is rounded up to 69 per cent or £50.03 a week from April instead of the full £72.50. A woman with 30 years contributions would normally get 30/39ths or 77 per cent - £55.83 a week from April.

In some cases a woman can get more. Her working life – the bottom figure in the fraction – is reduced for each year she was not paying contributions and was getting child benefit for a child or she was looking after someone else who got attendance allowance or disability living allowance. This rule only applies for years from April 1978 – it also of course applies to men if they were the main payee on the child benefit book or were looking after someone in this way and not working. Needless to say the rule is not quite as simple as that, and the effect for a woman who spent five years not working in these circumstances who had 30 years contributions is to knock four years – not five – off the bottom part of the fraction so she would then get 30/35ths or 86 per cent of the full pension - £62.35 a week from April.

If the calculation shows that your pension will be 24 per cent or less then you get nothing. That means you need at least nine (sometimes ten) years of contributions to get any basic state pension. Note that the working life of people born before July 1932 may be shorter.

If you are working, you have to pay National Insurance contributions even if you have enough to get a full pension.

Time abroad
If you have spent time abroad then that may leave a gap in your National Insurance contribution record. However, Britain has agreements with some countries which mean that time spent there – or taxes paid there – can count towards your National Insurance record here. Alternatively you may be able to claim a pension from that country for the time spent there as well as your UK pension. The rules about time spent in Australia are changing. If you have spent time there before April 6 2001 that does count as if you had paid full National Insurance contributions here. The agreement with Australia has now come to an end and any time spent in Australia in 2001/02 and later will not count towards a UK retirement pension.

Married women
Nowadays most women who retire will have paid their own National Insurance contributions and get their own retirement pension. A woman who has paid full National Insurance contributions will get a full pension at age 60 - £72.50 a week from April – regardless of her husband’s age or pension. If she has paid less than full contributions then she will get a reduced pension at 60, if she claims it. When her husband reaches 65 she has another way to claim a retirement pension – she can claim a ‘married woman’s pension’ on his contributions. The married woman’s pension is about 60 per cent of the full pension – £43.40 from April. So once she is 60 and her husband is 65 she will be given whichever pension is the higher – a pension on her own contributions or a pension on her husband’s contributions. If her husband has an incomplete contribution record then her pension will be reduced as well. In addition to either of these amounts she will get any graduated retirement benefit or additional pension which she has earned herself.

A woman who is divorced can use her husband’s contributions up to the date of the decree absolute as if they were her own. The same rules apply to men. Similar rules apply if a wife or husband dies.

A man who has retired and has a dependent wife under 60 can get an extra pension equal to the married woman’s pension until she reaches 60.

In addition
On top of the basic retirement pension most people have some extras.

· Graduated retirement benefit – also called also called graduated pension – based on graduated contributions paid at work between 1961 and 1975. These contributions were paid by almost everyone at work including women paying the married woman’s stamp.

· Additional pension – also known as SERPS is – based on contributions paid on earnings from 1978. Even people who did not pay into SERPS will normally get some additional pension.

These amounts are paid on top of any basic retirement pension or a married woman’s pension. In fact they are paid in full even if you have no entitlement to a basic retirement pension at all.

Paying extra
If you have a gap in your National Insurance record you may want to pay extra voluntary contributions to fill it. You can pay voluntary contributions in any year that you are not working to make sure that year counts towards getting a full state retirement pension. You can pay voluntary contributions for the current tax year and for up to six years before that year. So up to April 5 2001 you can pay voluntary contributions for 2000/01 and for the six years back to 1994/95. But from April 6 you will only be able to pay back to 1995/96. The cost of these voluntary contributions paid in 2000/01 is £340.60 per year – though the two previous years will be slightly cheaper. From April 6 that cost rises to £351.

Claim it
You must CLAIM your pension. In most cases the Benefits Agency will write to you before you reach pension age. But whether it does or not if you do not claim your pension you will not get it. A retirement pension can only be backdated for three months. So if you wait longer than that you will lose money. Claim by contacting your local Benefits Agency office.

Find out more
You can get a forecast of what your retirement pension will be by filling in a form called BR19. You can get this form by ringing 0191 218 7585. The forecast will be sent in a couple of weeks and will set out what your current entitlement is, what you will get if you carry on working – or don’t work – until you reach pension age, and whether it is worth paying voluntary contributions. Alternatively, if you have access to the internet you can print off the form from the Department of Social Security website or even complete it online.

The Department of Social Security has a very comprehensive booklet called NP 46 A guide to Retirement Pensions. A new edition of this guide should be available by the time you read this. You can get it through your local Benefits Agency office or through the Department of Social Security website. National Insurance contributions are now the responsibility of the Inland Revenue

March 2001

e-mail Paul Lewis on paul@paullewis.co.uk