Please see below for one of AJ Bell’s latest articles, received by us yesterday 13/05/2021:
WHAT IS THE UK STATE PENSION AGE?
The current UK state pension age is 66 for both men and women. It used to be the case that women received the state pension at age 60 and men at 65, but this was viewed as discriminatory and so successive Governments legislated to equalise the state pension ages of the sexes.
This happened in 2018, at which point the state pension age for men and women was slowly increased to 66 by 2020.
The state pension age is scheduled to rise again to 67 between 2026 and 2028. As with the increase to age 66, there will be a two-year transition where some people will have a state pension age somewhere between 66 and 67.
After 2028 the next intended increase in the state pension age is to 68 between 2044 and 2046. However, the Government has stated it wants to accelerate this move so it happens seven years earlier, between 2037 and 2039.
I RETIRED BEFORE 6 APRIL 2016 – HOW MUCH STATE PENSION WILL I RECEIVE?
For those who reached state pension age before 6 April 2016, there were two primary components: the basic state pension and additional state pension. This additional element consisted of:
- Graduated Retirement Benefit built up between 6 April 1961 and 5 April 1975;
- State Earnings Related Pension Scheme built up between 6 April 1978 and 5 April 2002;
- State Second Pension built up between 6 April 2002 and 5 April 2016.
The full basic state pension is worth £137.60 a week in 2021/22 and rises each year in line with the highest of average earnings, inflation or 2.5% (the ‘triple-lock’). You needed at least 30 years’ National Insurance contributions to qualify for the full amount – for those with less than this, a deduction would have been made.
The triple-lock does not apply to any additional state pension entitlements you have, which instead increase each year in line with CPI (consumer prices index) inflation.
I RETIRED ON OR AFTER 6 APRIL 2016 – HOW MUCH STATE PENSION WILL I RECEIVE?
The Government decided the state pension system was too complicated and so, for those who reached state pension age on or after 6 April 2016, a reformed system was introduced.
Rather than having two tiers of state pension – the basic and additional state pension – people now build up entitlements to a flat-rate amount. In 2021/22 the full flat-rate state pension is worth £179.60 a week and also increases in line with the triple-lock.
You need to have at least a 10-year National Insurance contribution record to qualify for any state pension under the reformed system, and a 35-year National Insurance contribution record to qualify for the full amount.
Those who had built up state pension entitlements under the old system and had not reached their state pension age before 6 April 2016 had a ‘foundation amount’ calculated. This foundation amount was the higher of:
- Total benefits built up under the basic state pension and additional state pension, with a deduction made to take account of any years the individual was ‘contracted-out’;
- Total benefits the individual would have built up had the reformed state pension been in place at the start of their working life, with a reduction applied where the individual was contracted-out.
The idea behind this was to ensure those who had built up entitlements under the old system which were more valuable than the reformed state pension would not lose out.
Anyone with a foundation amount equal to the full flat-rate state pension at 5 April 2016 would not have been able to build up any extra state pension – even if they add more qualifying years to their National Insurance contributions record.
Those with a foundation amount below the full flat-rate state pension could continue to build up qualifying years via National Insurance contributions and boost their state pension entitlement.
People with a foundation amount worth more than the flat-rate state pension would receive the full flat-rate amount plus a ‘protected payment’ to reflect the extra entitlement built up under the old system. They would not gain any extra pension for further qualifying years they accrue.
While the flat-rate element of this pension will rise in line with the triple-lock, the protected payment increases by CPI inflation only.
WHAT IS ‘CONTRACTING-OUT’ AND HOW COULD IT AFFECT MY STATE PENSION ENTITLEMENT?
‘Contracting-out’ was an option previously open to people whereby, in exchange for lower National Insurance payments, employees agreed to opt-out of the additional state pension, meaning they would not build up an entitlement towards it.
For those reaching state pension age after 5 April 2016, any years they contracted-out will be deducted when figuring out your foundation amount.
You can check if you were contracted-out by contacting your pension provider or reviewing an old payslip. If you don’t have either, try the Government’s pension tracing service here.
CAN I DEFER TAKING THE STATE PENSION?
It is up to you to claim your state pension from the Department for Work and Pensions. However, it is also possible to defer taking your state pension – and you’ll receive an uplift for doing so. The level of this uplift will depend on when you reached state pension age.
For those who reached state pension age before 6 April 2016, the rate of uplift is 1% for every five weeks you defer, subject to a minimum deferral period of five weeks. This works out at a 10.4% increase in your state pension if you defer for 52 weeks.
Based on the 2021/22 basic state pension of £137.60 per week, this works out at an extra £14.71 per week if you deferred for one year.
For anyone who reached state pension age on or after 6 April 2016, the deferral rate is 1% for every 9 weeks they defer, or just under 5.8% for every 52 weeks.
This increase is applied to the flat-rate state pension. Based on someone receiving the full flat-rate state pension for 2021/22 of £179.20 a week, a person who deferred for 52 weeks would get an extra £10.42 a week.
Both of these examples assume there is no annual increase in the value of the state pension. If there is an annual increase, the amount you receive could be larger.
SHOULD I DEFER TAKING THE STATE PENSION?
Whether or not state pension deferral is the right option will depend on your personal circumstances.
For some it simply won’t be possible as they need the state pension income as soon as possible, while for others it might depend on their health and lifestyle. But if you are in good health then it could be worth considering.
Take someone who reaches age 66 in 2021/22 and is entitled to the full flat-rate state pension of £179.60 a week in 2021/22. If they defer taking this income for one year they will forgo £9,339.20 in return for an extra £10.42 a week for the rest of their life.
SO THE KEY QUESTION IS: AFTER HOW LONG COULD YOU ‘BREAK EVEN’?
Based on the state pension increasing by 2.5% each year, it could take 15 years to take as much total income via deferral as you could have done by taking the state pension at age 66.
For someone with a state pension age of 66, this implies the point at which they might be in ‘profit’ from deferring the state pension could be around age 81.
Given average life expectancy for a 66-year-old man is 85 and a 66-year-old woman is 87, this suggests that, provided you are in good health, delaying receiving your state pension could pay off financially.
State Pensions are a complex area as legislation has changed frequently over the last few decades. Whether or not you should draw on your State Pension at your State Pension age depends on your own specific circumstances. It’s a good subject to pick up with your I.F.A.
A great starting point would be to get an up-to-date State Pension forecast, these are the contact details for the dwp:
- Or call the Future Pension Centre on 0800 731 0175 and request a paper copy
Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.
Keep safe and well.
Paul Green DipFA
14/05/2021