The rules on how much state pension you can get are complicated, and they all changed in April 2016. Here we explain how it works.
How much new state pension will I get in 2020/21?
The state pension rules changed radically on 6 April 2016, for men born on or after 6 April 1951 and women born on or after 6 April 1953. There is a ‘single tier’ pension payment for people in this age group with a ‘full level’. In 2020/21, the full level of the new state pension is £175.20 a week (£9,110.40 a year). You may get more or less than this. We’ve explained why in more detail below Because of the changes to the state pension, you can no longer build up an additional state pension – nor can you ‘contract out’ of it to get a higher private pension. And you only qualify for a full state pension once you have 35 years’ worth of National Insurance contributions. Previously it was 30 years’ worth. To get any state pension at all, you need 10 years of National Insurance contributions.
How much basic state pension will I get in 2020/21?
If you reached state pension age before 6 April 2016, the changes don’t affect you. In this case, the basic state pension is £134.25 a week (£6,981 a year). If you’re married, and both you and your partner have built up state pension, you’ll get double this amount – so £268.50 a week. But if your partner hasn’t built up their own state pension, they’ll still be able to claim a state pension based on your record. You may also have built up some additional state pension, previously known as the State Earnings Related Pension Scheme (Serps) or state second pension (S2P). If you did so, you’ll get more than £135.25 a week. The maximum you can receive is £179.41, in addition to the basic state pension.
How much state pension will I get if I qualified on or after 6 April 2016?
If you reach state pension age on or after 6 April 2016, the starting point for calculating what you get is the ‘full level’ of the new state pension of £175.20. But the name is confusing, because you may get more or less than this. If you have made full National Insurance payments, building up additional state pension, you’re likely to get more. If you ‘contracted out’ and paid reduced National Insurance contributions for several years, you’re likely to get less. You’ll get whichever is higher – the amount you would have got on the last day of the old system, or the amount you would get had the new system been in place over the whole of your working life. Government estimates show that only around half of those retiring over the next year will qualify for the full state pension.
What was ‘contracting out’?
To cut the bill for the state pension, the government previously allowed pension savers to ‘contract out’ of being part of the second state pension scheme. You paid less National Insurance (NI) and didn’t get the additional state pension, and the money you saved in NI was put into your workplace or private pension.
What if I’ve been contracted out?
If you were contracted out, you’ve been making NI contributions at a reduced rate (in a final salary scheme), or receiving a rebate into your pension (in a ‘defined contribution’ scheme, where you build up a pension pot). Under the new system, as with the old one, those who contracted out will get less state pension than those who didn’t. Millions of workers will also start to pay higher National Insurance as the end of contracting out in final salary schemes means they now pay full NI contributions. If you were contracted out but carry on working for a number of years after 2016, making full-rate NI contributions, you can build up further state pension until you reach the full level of new state pension (£175.20).
What if I’ve been mainly contracted in?
The new rules mean that no one will lose any additional state pension they’ve accrued by making full National Insurance contributions. Whichever value is the highest, under the old or new system, that will be your starting amount. If this is more than the new maximum full level of state pension (£175.20), you’ll get the higher amount.
How is my state pension calculated?
The Department for Work and Pensions (DWP) applies a formula, taking into account the number of full National Insurance years you have, contracted-out periods and the additional state pension you’ve accrued, to work out have much state pension you’re due. If you’ve never been contracted out, or earned any additional state pension, calculating how much you’ll get is much simpler. For example, say you have 25 qualifying years on your National Insurance record. You divide £175.20 by 35 and then multiply by 25. Your new state pension will be about £125.14 per week.
What is the Contracted-Out Pension Equivalent?
Forecasts from the DWP include an additional element entitled COPE – the Contracted-Out Pension Equivalent. COPE is the equivalent of the additional state pension you would have got if you had not been contracted out So you won’t get this as part of your state pension, but should get it instead from your workplace or personal pension scheme for the periods you were contracted out. This is clearly quite a broad estimate and the exact amount your scheme will pay you as a result of contracting-out as it will depend on the actual rules of your private scheme, and possibly any investment choices you may make.
Read more: https://www.which.co.uk/money/pensions-and-retirement/state-pension/your-state-pension-and-benefits/how-much-state-pension-will-i-get-aukgp6n9jkcz – Which?