Later this month the Government will set out its plans for the future of pensions. But already it is clear that the Government has rejected radical simplification of the state pension. Instead it seems likely to add to what Lord Turner has called the "bewildering complexity" of the current system. Any change it does introduce is unlikely to start before 2010 and will probably not affect anyone who is already getting the state pension. Even people in their fifties are unlikely to feel much impact from the changes. They are stuck with "the most complex pension system in the world" which I will now try to explain.
Let me start with a point that may seem trivial but which angers many readers. The state retirement pension is paid on a Monday. If your birthday falls on any other day you have to wait until the next Monday to get it. So people who reach pension age on a Tuesday lose 6 days pension. It saves the Government around £20 million a year. Is it fair? No. Is it the law? Yes.
Women born before 6 April 1950 can get their state pension at 60. Women born after 5 April 1955 have to wait until they are 65. Women born between those ages will be able to claim their pension between 60 and 65. Men can claim at 65. But Ministers have made it clear that from 2020, when the women’s age reaches 65, further rises
are ‘inevitable’ – details awaited.
When you reach pension age the state pension has to be claimed. If you forget – and the form often goes to the wrong address – then you can claim it late but it will only be backdated for up to a year – it used to be only three months. You should always ask for your pension to be paid weekly in advance. The DWP will offer you payments either four or thirteen weeks in arrears. But you get no extra for that delay. So ask for it weekly. It will be paid direct into your bank account.
Basic pension
If it is more than four months before you reach pension age you can get a
pension forecast from The Pension Service. When you get the forecast – or your
pensions – it will be in several bits. The main one is the basic state pension.
That is £84.25 a week if you have paid enough National Insurance contributions
during your working life. ‘Enough’ normally means paying contributions for 39
years between 19 and 60. You get credits for the years before 19. And men get
credits for the years after they reach 60. So both men and women can get a full
pension with 39 years of contributions. You can get them paid for you, called
‘credits’, if you receive certain benefits. People who are at home bringing up
their children get a second rate alternative to credits called Home
Responsibilities Protection (HRP). It helps them get a bigger pension but seldom
a full one. Women who cared for children before 1978 do not get HRP. Reform of
this system is very likely in future.
Women who paid the worthless married woman’s contributions are normally excluded from HRP for the first two whole tax years after they stop working. Women paying the married woman’s contribution should stop as soon as they can. Even if they get no more basic pension they will earn additional pension – often at favourable rates.
You have to pay contributions until you reach pension age even if you have already paid enough to get a full pension.
Divorced people can use the contributions paid by their former spouse up to the date of the divorce. Separated people are treated as married. So divorcing can boost a separated woman’s pension. Widows and widowers can also use the contributions of their late spouse if that helps them claim a full pension. People who remarry lose these rights.
You can pay extra contributions to fill gaps back to 1996/97. Earlier gaps cannot be filled. Each year you fill will cost you between £309 and £382 and boost your pension by either £1.69 or £2.53 a week – it’s a matter of chance which it is. So it will take at least just over two years – and possibly more than four years – to get your money back. Married women should make sure before paying that the pension they get will be more than they could get on their husband’s contributions. Some women who have no entitlement to a pension will find that paying one or two years will give them an entitlement to a pension of more than £20 a week.
A married woman who is at least 60 can claim a pension on her husband’s contributions as long as he is already claiming his pension. It is called a Category B pension and is £50.50 a week. If she has her own pension she cannot get them both – she gets whichever is the higher. It is taxed as her income. If she is under 60 she cannot claim this pension but her husband may be able to claim extra pension of £50.50 a week, which is taxed as his income. He won’t get the extra if she earns £57.45 a week or more, or has a company or personal pension of that amount or more.
At 80 you get an extra 25p a week. When it was introduced by Edward Heath the extra 25p was a 4% rise on the £6 a week pension. Today it is not enough to buy a second class stamp.
Extra bits
On top of the basic pension there are two main extras. Graduated retirement
benefit which is based on contributions paid between 1961 and 1975. The amounts
are tiny – the average is £1.69 a week – but it is paid on top of any basic
pension even if your entitlement to that is zero.
Additional pension is the posh name for State Earnings Related Pension (SERPS) which since 2002 has been called State Second Pension (S2P). It is based on National Insurance contributions paid from 1978. Almost everyone retiring now gets some SERPS. It can be as much as £146 a week on top of your basic pension. But the average paid to people who retired recently is just £13.33. That is because most people have been persuaded to ‘contract out’ of SERPS and divert some of their National Insurance contributions into a personal or company pension. Those pensions may well not pay as much as the SERPS you have given up. You will see on your pension statement the additional pension you would have got and then the amount by which it has been reduced because the contributions were diverted into your work or personal pension. That is called ‘contracted out deduction’. The difference, which might be very small, is the additional pension paid to you.
If you delay claiming your pension after pension age it is boosted by slightly more than 10% for each year you defer it. So one year’s delay will mean a state pension of £93.01 rather than £84.25. Ten years’ delay would more than double it. Alternatively, you can draw the same pension when you retire and take the deferred amount as a lump sum. The Government will work this out as if the deferred pension had been invested and had grown at 6.5% a year. The lump-sum will be taxed at the rate of tax you pay on your existing income. You cannot get these increments if you claim another benefit instead such as Bereavement Allowance.
The danger with deferring is that you may not live to enjoy it. If you genuinely do not need your state pension it might be better to take it and use it to pay off debt or to save in a high interest cash account. Then at least it forms part of your estate if you die.
The state pension is usually not enough to live on. At 60 the Government will top up your income with pension credit so that it is at least £114.05 a week if you are single or £174.05 for a couple. If you (or your partner) are 65 or more then you may get more. For example if your income is £125 and you are single you will get another £13.50 to make it up to £138.50. If you are part of a couple with a joint income of £200 you will get another £13.20 to make that up to £213.20 a week. Savings over £6000 will reduce these amounts. Pension credit is not paid outside the UK.
It is also worth claiming money off your council tax. If you get some pension credit you will almost certainly get some or all of your council tax paid for you – if you apply for council tax benefit. Remember if you live alone council tax is reduced by a quarter regardless of income.
More information
Pension Credit (and council tax benefit) application line 0800 99 1234
State Pension Forecast 0845 3000 168
www.thepensionservice.gov.uk
May 2006