A flat-rate state pension
From 2016 there will be a weekly flat-rate pension of around £144 in today’s money. This will replace the current system of the basic state pension and the earnings-related additional state pension (known as S2P and previously known as SERPS).
The change will mean a much simpler system. You’ll build up entitlement to the state pension based simply on how many years of National Insurance contributions or credits you have. The amount you earn will no longer have any bearing on how much state pension you get.
There are two parts to the State Pension: the Basic State Pension and the State Second Pension or S2P, which prior to April 2002 was known as the State Earnings Related Pension Scheme (SERPS).
The basic State Pension
When an individual reaches State Pension Age (SPA), they may be entitled to receive a basic State Pension (SP) which is paid by the government. Currently, the SPA for men is 65 but will rise in the future: the SPA for women is being raised gradually from age 60 to age 65.
The date an individual reaches SPA depends on when they were born. For women born before 6 April 1950, it is 60: for men born before 6 April 1959, their SPA is 65. For women born on or after 6 April 1950, but before 6 April 1959, their SPA is being increased gradually to 65 between the years 2010 and 2020. The SPA for women born on or after 1955, but before 6 April 1959, is 65.
The SP (which is paid either weekly or monthly) is not paid automatically – it has to be claimed. The Pension Service (part of the Pension, Disability and Carers Service which is an executive agency of the Department for Work and Pensions) will usually send the individual the necessary application form in advance of him or her reaching SRA.
The amount of SP a person can expect to receive is based on their National Insurance Contributions (NIC) record over their working life, from age 16 to SPA. Those years when an individual has paid (or has been credited with) sufficient NICs are known as ‘qualifying years’.
People reaching SPA on or after 6 April 2010, are entitled to receive the full SP provided the record shows that they have 30 qualifying years. Where an individual has less than 30 qualifying years, he or she will receive a proportionally lower pension – i.e., 17 qualifying years for example equates to 17/30ths of the full SP – although one, single qualifying year of NICs qualifies an individual for at least some SP. It is sometimes permissible however, to make good any gaps in a contribution record by making additional ‘top up’ contributions – for further information and a basic State Pension valuation, call the National Insurance Helpline on 0845 915 5996.
The SP is linked to inflation and changes every year: the full SP for a single person is £97.65 a week; for married couples it is £156.15 a week (June 2010).
The SP can still be claimed even if the individual is working. Although when an individual reaches SPA they no longer pay NICs, they don’t necessarily stop paying income tax. Income tax will still be payable if the individual’s taxable income (including any and all of their pension benefits) totals more than their tax free allowances.
SP can be paid to people living anywhere in the world, but as and when it increases, and depending on which country they are living in, the person may not receive the increase automatically.
It is not compulsory to claim the State Pension at State Pension age – it can be deferred. In return for not claiming their SP, and provided the claim is deferred for 12 months in a row, the individual will receive either extra benefit, or a one off, lump sum payment with interest.
SERPS (State Earnings Related Pension Scheme) and State Second Pension (S2P)
SERPS was a government-run pension scheme which intended to provide an additional earnings-related pension to the basic State Pension for employed (not self employed) individuals who are not members of an occupational or personal pension scheme. Basically, the scheme aimed to provide the retiree with a pension equating to 20% of his or her earnings provided the individual completed a minimum number of years within the scheme. In April 2002 SERPS was replaced with the State Second Pension or ‘S2P’ as it is known.
The government currently gives individuals the option to leave – i.e., ‘contract out of S2P into a personal pension or stakeholder pension of the individual’s choice. When an individual contracts out, some of their NICs (and related income tax relief) are redirected to the individual’s personal pension. Other than for members of final salary occupational schemes, it is expected that government will remove the option to contract out of S2P from 2012.
Any individual who pays NICs but is not a member of a contracted out occupational pension scheme, or has not opted out of SERPS or S2P in favour of a personal pension, will be contributing to a S2P.
Employed people and their employers who have paid full standard rate class 1 NICs at some point between 1978 and 2002 will have earned a second pension entitlement. The amount of S2P or SERPS benefit an individual is entitled to depends on their earnings, their NIC records over a number of years and the government’s pension policy at the time they retire.
S2P benefits are paid at the same time as the basic State Pension.