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1.1 State Pensions - Basic State Pension

1.1.1 

The Basic State Pension was introduced in 1948. Nowadays everyone receives the same Basic State Pension in return for paying National Insurance contributions. No fund is set aside to invest contributions.The State Basic Pension is funded on a Pay As You Go (PAYE) basis.

Note 

Reform of the Basic State Pension is under way, following consultation. A flat-rate State Pension of around £144 per week (in 2012/13 terms) is to be introduced from April 2016 in place of the current Basic State Pension and State Second Pension [see 1.1.7(iv) and 1.2.3]. The Basic State Pension is:

2014/2015 £ per week
Single Person 113.10
Married couple (on husband’s contributions) 180.80
Married couple (having both paid contributions) 226.20

Table   See STATE PENSIONS, RATES

NI Contribution conditions 

To receive the full basic pension, contributions must have been credited for at least 90% of working life (working life is the period between age 16 and State Pension Age). However, for people who reached their State Pension Age after 6 April 2010, currently only 30 qualifying years are needed for a full Basic State Pension (previously based on a working life that resulted in 44 years for a man and 39 years for a woman) though, via reforms under way, 35 qualifying years of NI contributions will be required to qualify for the full flat-rate pension. NI credits towards State Pension are granted to grandparents caring for their grandchildren.

Table   See STATE PENSIONS, PERCENTAGE PAYABLE

1.1.2 

Pension in payment is taxable. [See also 1.1.11]

Note 

State retirement benefits can be paid in two ways: by weekly order book cashed at the Post Office, or paid into a bank or building society, etc. and, if required, can be deferred (for up to five years).[See also 1.1.11]

1.1.3 

Increases to Basic State Pension

Prior to 6 April 2011, the Basic State Pension increased each year in April, in line with the increase in the Retail Prices Index over the calendar year to the previous September or by 2.5% p.a. if higher. Effective 6 April 2011, and subject to affordability and the fiscal situation, the annual increase is the higher of (a) 2.5% p.a. or (b) increases in the CPI (deemed to be price inflation) or (c) increases in national average earnings, producing a thrice-guaranteed annual increase basis.

Table   See PRICES INDEXES FROM 1962

Note 

People who pay National Insurance contributions are also able to claim other contributory State benefits such as Job Seekers Allowance, incapacity benefit, bereavement payments and allowances, and widowed parent’s allowances. Non-contributory State benefits include income support, housing benefit and family credit benefits. Separately, employers are responsible for paying statutory maternity pay (SMP).

Table   See AVERAGE EARNINGS INDEX FROM 1970

1.1.4 

State pension cannot be exchanged for cash. [But see 1.3.8.]

1.1.5 

All who pay National Insurance contributions are entered into the Basic State Pension Scheme.

Note 

An individual will need from seven to ten years of National Insurance contributions or credits to qualify for any single-tier State pension. For prisoners, the regulations will continue to provide that a person ‘is not to be paid a State pension whilst imprisoned, detained in legal custody, or unlawfully at large’.

1.1.6 

Negligible lump sum benefits on death from the State.

1.1.7 

State Pension Age – changes under way

With life expectancy continuing to improve, additional changes to State Pension Age (SPA) are in the pipeline. Here is the history:

  (i) 

Initial proposal to equalise SPA – The Pensions Act 1995 (and subsequently the Pensions Act 2004) introduced provisions for State Pension Age (SPA) to be equalised at age 65 for men and women [see 2.4.13 (Note) (iii)]. No change would be made for women born before April 1950, who retain an SPA of 60. The required increase in SPA for women would be made in stages, moving from age 60 up to age 65 over the ten-year period from April 2010 to April 2020; meaning that women born after 6 April 1955 would reach age 65 by April 2020.

  (ii) 

Revision – The Pensions Act 2007 revised SPA further. Once equalised in 2020, SPA for both men and women would increase from age 65 to age 68 in stages between 2024 and 2046, with each change being phased in over two consecutive years in each decade. Thus the first increase from age 65 to age 66 would take place between 2024 and 2026; the second, from age 66 to age  67, between April 2034 and April 2036 and the third, from age 67 to age 68, between April 2044 and April 2046.

  (iii) 

Further revision – Due to revised projections of average life expectancy, the proposed time frame for increasing SPA was brought forward by the Pensions Act 2011 to ensure that women’s SPA would join men’s at 65 by 6 November 2018. After that SPA would increase to age 66 between November 2018 and October 2020; then age 67 between 2034 and 2036 and further still to age 68 between [2044 and 2046].

  (iv) 

Next revision – To ensure that SPA reflects further anticipated increases in life expectancy, the Pensions Bill 2013 contains measures to increase it from age 66 to age 67 between 6 April 2026 and 5 April 2028 (to be reviewed regularly every five years with continuing improvements in life expectancy). Thereafter (rumour has it), SPA will increase from age 67 to age 68 in the mid-2030s and to age 69 in the late 2040s.

Note 

From 6 April 2028 (when the State Pension Age will rise to 67), people aged less than 57 will be unable to draw their private pension benefits without a tax penalty, whether or not this is the point at which they stop work. From that date, this minimum pension age in the tax rules will rise in line with the State Pension Age, so that it is always ten years below.

Source: Ending the requirement to annuitise, Commons Library Standard Note

 

Table   See STATE PENSIONS, FEMALE STATE PENSION AGES

Note 

Under the Civil Partnership Act 2004 [see 10.9.9] civil partners have had the same pension rights and access to State pension benefits as married couples.

Individuals affected by changes in SPA can expect to receive at least ten years' notice of the changes.

1.1.8 

Pension Credit

Since April 2001 pensioners have been entitled to a weekly guaranteed minimum income – maintained through income support and confirmed via means testing. With effect from April 2014 for those aged between 60 and 75 Pension Credit is £148.35 p.w. (couple: £226.50 p.w.). Higher amounts apply for the age band 75 to 79.

Note 

The effect of means-testing can be counter-productive. Many people deserving of payment are disinclined to submit themselves to the test. Others see the existence of a test as a reason to justify not saving for retirement. Changes to State Pension Age [see 1.1.7] may affect the qualifying age. Pension Credit is revalued in line with earnings (rather than in line with RPI).

1.1.9

For many pensioners the difference between the Basic State Pension and the Pension Credit will likely be filled by the Additional State Pension and/or any private pension provision.

Note 

Effective 6 April 2010, state pension and pension credit became payable in arrears, with day of payment based on NI number.

1.1.10

State Pension Forecasts

Individuals within four months of State Pension Age are automatically provided with a pension claim ‘pack’ from the Pension Service section of the Department for Work and Pensions. Those who are more than four months away from State Pension Age may apply for a State Pension forecast by filling in Form BR19.

Note 

www.thepensionservice.gov.uk

State pension forecasts provide personal details, in today’s money values, about the Basic State Pension, Additional Pension, any contracted-out deductions, and Graduated Retirement Benefits (earned between 1961 and 1975) and widows/widowers’ benefits. [See 11.4.5]

1.1.11 

State Pension deferral

Currently, individuals reaching State Pension Age may delay claiming their State Pension. Initially, for every year delayed, an increment of around 7.5% (1% extra State Pension for every seven weeks deferred) is added to the pension and is paid out as a larger pension when the pension is claimed.

To encourage people to work a little longer, or to work part-time (i.e. to better facilitate flexible retirement), the 7.5% was increased to 10.4% (i.e. 1% for every five weeks deferred) for each year delayed after 6 April 2005.

A second option is available under the Pensions Act 2004. Persons reaching State Pension Age may delay their pension and at a later date claim a taxable lump sum instead of a weekly increased pension. Under this option, a delay of five years could produce for males a lump sum of around £30,000 before tax (average for females: £18,000 – normally due to reduced working years). Those already claiming their State Pension may have the same opportunity to delay their State Pension in favour of building up a lump sum entitlement.

Note 

State Pension can only be delayed for up to five years. Persons currently claiming State pension can decide to stop claiming their pension and receive instead an increased pension or lump sum later. In order to claim a taxable lump sum, pension will have to be deferred for at least 12 consecutive months.

NOTE: Those who reach pensionable age on or after start date for the new State pension (1 April 2016 [see 2.14.5]) and who defer their State pension, will not be able to accrue a lump sum on deferral. Nor will there be any inheritance of any increase accrued by the deferral of State pension.










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