This piece first appeared in The Daily Telegraph on 21 February 2004
The text here may not be identical to the published text
Retirement Pension in a State
Anyone hoping to rely on the state in their old age is in for a nasty shock. The full basic pension is £77.45 a week or £4027.40 a year. That is barely 16 per cent of average pay and only 43% of a week’s pay on the National Minimum Wage. More than one in three pensioners, most of them women, do not even get the full basic pension. That is only paid to people to have been in work and paying full National Insurance contributions for most of their working life.
These complex rules date back to World War II and many of the bureaucrats who devised them were born when Queen Victoria was on the throne. No wonder the Economic Affairs Committee of the House of Lords recently called for the whole system to be scrapped and everyone to be given a pension depending solely on their residence in the UK.
On top of the basic pension the state has provided an earnings-related pension from 1978 for people who were not paying into a private scheme. Originally called SERPS it can be £138 a week, but most people get much less than that – many get just a few pounds and some get none at all.
Because the basic state pension is not enough to live on, the Government now provides a means-tested Pension Credit which half of all pensioners can claim. This credit uses a different set of complex rules to dole out a ‘guarantee credit’ of up to £24.65 a week to single people aged 60 or more and £32 between them to a couple. That will bring their weekly income up to £102.10 a week single or £155.80 between them for a couple. People aged 65 or more who have some small savings or pension income above the state pension can also be given a bit extra. It is called ‘savings credit’ and is up to £14.79 a week (single) or £19.20 for a couple. Some savings credit is paid if weekly income is less than £139.08 for a single person or £203.80 for a couple.
The pension credit has to be claimed separately and recent figures indicate that there is strong resistance. One 65-year-old reader in Wales who wanted to remain anonymous told The Daily Telegraph
"What really gets me is this benefit is means-tested and we were told our pension would not be. They demand to know every last penny you have in the house. I have spoken to a lot of people my age and they say we’re not going to bother because its means tested. Most people in retirement are on a low income, they should give it to everyone."
So far 2.5 million people get Pension Credit – about half of those entitled. But most of those have been transferred automatically from its predecessor, the minimum income guarantee. Only around 700,000 have claimed it directly, leaving another 2.5 million still to claim.
Even people who have very good state pensions are struggling. Alan and Alice Bader from Lincolnshire have both worked all their lives. She sewed buttonholes in a clothing factory and he was a lorry driver. Neither paid into a company pension as Alan explained.
"I’d have loved the chance to be able to pay in. But in my day that wasn’t for manual workers. Just sales staff and the like. At my last company I did make them extend the pension to everyone and I paid in for a few years but it would have been so little, £3 or £4 a week, that I took it as a small lump-sum. We only have about £3000 in the bank."
Because he was not paying into a company scheme for most of his working life, Alan paid into SERPS and his state pension totals £121 a week. Alice, who wisely paid full National Insurance contributions most of her life, gets £71 a week. But they still find it hard to manage even though their state pension is much higher than most couples get.
"I don’t complain, maybe I should complain more. I run a small car but that’s our only luxury if you like. We don’t drink or smoke. But it is difficult. I work one day a week washing cars and mowing grass. The extra money is useful and I like to keep busy. I wish I could have saved more but in my day you just didn’t earn enough. So yes we manage but it is a struggle. We could just do with a bit more. We often say that if Alice had the same income as me we would be very comfortable."
Alan has not claimed Pension Credit. "It’s something I want to look into when I have time". The calculator on the Pension Credit website indicates they are entitled to another £4.48 a week pension credit. When Alan realised this he was pleased. "Every little helps. I will definitely ring and claim."
The full basic pension is paid to people who have National Insurance contributions for roughly nine tenths of their working life – a period from the age of 16 to 65 for men. That is 49 years, so to get a full pension a man needs 44 years of contributions. At the moment women end their working life at 60 not 65, so a woman needs 39 years of contributions to get a full pension. However, pension age for women is being extended to 65 and women born after 5 April 1950 will have a longer working life – see Women Work Longer.
Normally National Insurance contributions are paid by people in work with their tax. But they can also be given by the state as ‘credits’. There are credits for the tax year people reach 16 and the following two years. But none for students who are at university after that age. There are also credits for the year you reach 60 and the next four years, credits for people who get benefits as unemployed or are too ill to work, and credits for some low paid people.
The biggest group of people who have poor contribution records are married women. They were encouraged to pay special contributions which earned them no pension at all and were a complete waste of money.
A married woman who does not have a pension of her own can claim a pension on her husband’s contributions. But she has to wait until he has reached 65 and of course she has to be over pension age too. This married woman’s pension is currently £46.35 a week – about 60 per cent of the full pension.
At pension age the state pension is worked out by adding up the contributions that were paid or credited and dividing that number by 44 for a man or 39 for a woman – that will grow to 44 as women’s pension age rises. It is expressed as a percentage and rounded it up to the next whole number. So a man who has contributions for 40 years will get a pension of 40/44 = 90.9% rounded up to 91%. Currently that would be £70.48 a week.
If the percentage is less than 25% then no pension is paid. If it is more than 100% then just the full pension is paid.
The sums are done slightly differently for some people who have an incomplete record because they had dependent children or were looking after someone with a disability. Then, each whole tax year spent caring is taken off the qualifying years needed to get a full pension. So a mother who had three children and had not worked for 14 years would need 25 years contributions instead of 39 to get a full pension. This rule is called Home Responsibilities Protection. It only applies to years from 1978/79 – before that time caring for dependants simply left a gap in the contribution record.
To qualify a parent must be the one who is paid the child benefit. People who care for a disabled relative should contact the Department for Work and Pensions and make sure their time caring is being counted as a period of Home Responsibilities Protection.
SERPS and State Second Pension
The State Earnings Related Pension Scheme (SERPS) is also paid for through National Insurance contributions. Some people who pay into a private pension – either through their company or a personal or stakeholder pension – are ‘contracted out’ of SERPS and part of their contributions go into their private pension rather than into SERPS. However, for technical reasons even people contracted out from the start is be entitled to a small amount of SERPS which represents some inflation proofing of the pension in its earlier years.
Contributions paid from April 2002 go into the new State Second Pension (S2P) which replaced SERPS. It is particularly valuable for lower paid people. People on very low earnings – and some people who earn nothing – are credited for S2P as if they earned £11,200 a year. The way the calculation is done means that everyone earning up to £25,600 will get more from S2P than they would have got from the old SERPS.
Self-employed people do not have any entitlement to SERPS or S2P. The Government has said it may extend S2P to self-employed people in the future.
Between 1961 and 1975 everyone in work paid extra National Insurance contributions towards graduated retirement benefit. This pension is not worth much – just a few pounds a week – but it is the only pension that some married women are entitled to. It can be paid by itself or in addition to any basic state pension.
Divorce and widowhood
People who are divorced or widowed can use the contributions paid by their spouse instead of their own if that will give them a better basic state pension. This right is lost on remarriage before pension age. So a couple contemplating marriage should consider postponing the wedding until after pension age. Widows and widowers can also get the graduated retirement benefit of their late spouse and at least half of their SERPS or S2P.
Paying extra contributions
Anyone who is more than four months away from pension age can find out what pension they will get by filling in a form to get a Retirement Pension Forecast BR19. The form is online at www.thepensionservice.gov.uk or can be ordered by calling 0845 3000 168.
The 3.6 million people over pension who get a reduced pension because they have an incomplete National Insurance record may find it worthwhile to pay extra contributions to make up their record. Gaps back to 1996/97 can be filled any time up to 5 April 2008. The cost of filling a year’s gap is between £309 and £361 and for each year paid the pension will be increased by either £81 or £121 a year. It will take between 2½ and 4½ years for the extra pension to be worth more than the back contributions. But as the pension is taxed and there is no tax relief on the contributions, pay-back will take rather longer for taxpayers – nearly 8 years in the most extreme case. However it can be more worthwhile for some married women whose pension entitlement is less than 25%. Pensions below that level are not paid at all so if paying an extra year or two takes them over that 25% barrier they will immediately start getting more than £1000 a year.
Anyone who gets pension credit but then boosts their pension will lose 40% of the extra.
Women Work Longer
Since the 1940s women have been able to claim their state pension at 60 while men have to wait until 65. But that is changing. Women born before 6 April 1950 will be able to get their pension at 60. Women born on 6 April 1955 or later will have to wait until they are 65. Women born between these two dates will be able to claim their pension between 60 and 65. Roughly speaking for each month her birth date is after 6 March 1950 she has to add a month to her pension age. The Pension Service website has an online calculator which works out pension age under these complex rules
The Pension Service
Pension credit claims 0800 99 1234
21 February 2004