The new State Pension
The new State Pension replaces the previous rules, which offered the basic and any additional state pension entitlements, for anyone reaching State Pension age on or after 6 April 2016.
- Since 6 April 2016, the new State Pension has provided a flat-rate, single-tier pension. From 6 April 2020, the full new State Pension amount is £175.20 per week. How much an individual will receive depends on their personal National Insurance contribution record and the minimum qualifying period.
- National Insurance payments recorded before 6 April 2016 are used to calculate a starting amount for new State Pension benefits.
- Your client can choose to defer state benefits. The rules on this are different depending on whether your client reached/ reaches State Pension age before or after 6 April 2016.
- Widowed clients may be entitled to an extra payment on top of their new State Pension.
When does the new state pension apply from?
For anyone reaching State Pension age on or after 6 April 2016, a new flat-rate, single-tier State Pension replaces all entitlements under both the basic and any Additional State Pension schemes. Those who reached State Pension age before 6 April 2016 will continue to receive their State Pension under the previous rules, and the new State Pension won’t apply to them.
How the new State Pension works
The new State Pension provides a flat-rate, single-tier pension of up to £175.20 per week (2020/21 rate). It’s based on people’s National Insurance records, and a minimum qualifying period applies.
People with no National Insurance (NI) contributions before 6 April 2016 will need 35 qualifying years to get the full amount of new State Pension. A qualifying year is each tax year that NI contributions are paid or credited. You pay NI contributions providing earnings are over a minimum amount or, if you’re not working, you may be eligible for NI credits.
National Insurance credits are received when in receipt of certain state benefits, for example claiming:
- Child Benefit for a child under 12 (or under 16 before 2010), or
- Jobseeker's Allowance or Employment and Support Allowance, or
- Carer's Allowance.
A reduced pension will be paid if less than 35 years of NI contributions are paid / credited. No benefit will be paid for contributions totalling less than 10 years. You may be able to pay voluntary NI contributions if you want to increase your State Pension amount.
The Government provide a service where you can find out;
- how much State Pension you could get (this amount is also known as your State Pension forecast)
- when you can get it
- how to increase it, if you can
Providing you have not yet reached State Pension age you can access this service at www.gov.uk/check-state-pension
Working beyond State Pension age
People receiving the State Pension don't have to stop working when they reach State Pension age. They no longer have to pay National Insurance contributions. They can request flexible working arrangements – default retirement age has been phased out and older workers can choose when they want to retire. So they can reduce their hours and work part-time, and employers must deal with applications for flexible working in a "reasonable manner".
Starting rate for the new State Pension for those with National Insurance contributions before 6 April 2016
Transitional rules apply as a result of the change to new State Pension for those with National Insurance contributions / credits recorded before 6 April 2016. These NI records are used to calculate a starting amount for new State Pension benefits.
The starting amount will be the higher of either:
- the pension amount accrued under the previous State Pension rules (which included Basic State Pension and any Additional State Pension), or
- the amount that would have accrued had the new State Pension been in place at the start of the individual's working life.
The starting amount will include a deduction for any period that person was contracted-out of the Additional State Pension.
This may result in a starting amount which is less, more or equal to the standard new State Pension rate of £175.20 per week (2020/21 rate).
If the starting amount is less than the full New State Pension, more state pension credit can be accrued by adding new qualifying years to National Insurance records after 5 April 2016 (until the full new State Pension amount is reached or State Pension age is reached – whichever is first). Each qualifying year on National Insurance records after 5 April 2016 will add about £5.00 a week (which is £175.20 divided by 35) to the new State Pension.
If the starting amount is more than the full new State Pension, the difference between the starting amount and the full new State Pension is called a protected payment. This is paid on top of the new State Pension and increases each year in line with inflation. However, any qualifying years accrued after 5 April 2016 won’t increase the overall State Pension entitlement.
For starting amounts that equal the full new State Pension, the new State Pension will apply at State Pension age.
All contracting-out ended with the introduction of the new State Pension, and all entitlement to Additional State Pension schemes for those retiring on or after 6 April 2016 has ceased – contracting-out through a defined contribution scheme ended in 6 April 2012.
Class 3A National Insurance contributions for those who reached state pension age before 6 April 2016
There were some people who didn’t have the opportunity to build a full entitlement to additional state pensions such as SERPs/S2P. And because they reached state pension age before 5 April 2016, they couldn’t benefit from the higher level of pension provided by the new State Pension.
People in this category include those who:
- had career breaks
- had low earnings
- were self-employed.
The government introduced Class 3A National Insurance contributions to give an opportunity to eligible people to build extra state pension. The option of paying class 3A NICs was open to anyone who had an entitlement to State Pension and reached state pension age by 5 April 2016, that is, before the introduction of the single-tier State Pension.
Those entitled were able to buy up to £25 per week of additional state pension, by paying class 3A voluntary NICs. This opportunity was available between October 2015 and 6 April 2017 but is now closed.
Any additional pension bought with class 3A NICs:
- will increase in line with CPI inflation
- will be inheritable on death, ie a surviving spouse will be entitled to at least 50% of the additional pension
- will be taxable
- will be taken into account in any assessment of income-related, means-tested benefits, including pension credit, housing benefit and help with council tax.
Not to be confused with class 3 NICs which can still be paid, however, note that these can only be used for:
- the current year
- gaps in National Insurance records from the past six years.
Gaps from more than six years ago may be added depending on age – you’ll find more details on this on the gov.uk website, including a calculator to help work out the cost of increasing State Pension benefit entitlements.
Deferring state benefits
Although a person may be entitled to receive a State Pension on reaching their State Pension Age, they may not wish to draw the benefits immediately. The State Pension can be deferred and the rules surrounding this are dependent on the date State Pension Age is reached.
Reached State Pension age before 6 April 2016
For those who reached State Pension before 6 April 2016, extra State Pension could be earned by choosing to defer the State Pension for at least five weeks.
The State Pension will increase by 1% for every five weeks of deferment, which equates to an increase of 10.4% for every full year of deferral.
A one-off lump sum payment can be chosen instead of an increase in pension entitlement, if claiming State Pension is deferred for at least 12 months in a row. This lump sum payment will include interest of 2% above the Bank of England base rate. Any extra State Pension generated by deferral is paid with State Pension and may be taxable. Any lump sum generated is taxed in the year of receipt, at the highest tax rate that applies to the person’s other income.
Spouses or civil partners may inherit extra State Pension or lump sum if the deferring individual dies while deferring their State Pension.
If partners are unmarried or not in a civil partnership when the deferring individual dies, the estate may claim up to three months of the deferred State Pension.
If the deferring individual reached State Pension age before 6 April 2010, the spouse / civil partner must have been over State Pension age when their deferring spouse or civil partner died, to inherit any of their extra State Pension or lump sum.
Reaching State Pension age after 6 April 2016
On reaching State Pension Age after 6 April 2016, the rules surrounding deferral of the new State Pension have changed significantly. Once claimed, extra state pension can only be taken as higher weekly payments. There is no one-off lump sum option for those who reach State Pension age after 6 April 2016. As with those reaching State Pension before 6 April 2016, any extra State Pension generated by deferral is paid with State Pension and may be taxable.
However, deferral will need to be for a minimum of nine weeks and the State Pension will increase by 1% for every nine weeks deferred. This equates to just under 5.8% for every full year of deferral.
And if any means tested benefits are being claimed, then extra State Pension will count as income and will affect these benefits, for example:
- Pension Credit
- Housing Benefit
- Council Tax Reduction
- tax credits.
If State Pension is being deferred, then any extra State Pension can’t be built up for the days when any of the following benefits are being received:
- Income Support
- Pension Credit
- Employment and Support Allowance (income-related)
- Jobseeker’s Allowance (income-based)
- Universal Credit
- Carer’s Allowance
- Incapacity Benefit
- Severe Disablement Allowance
- Widow’s Pension
- Widowed Parent’s Allowance
- Unemployability Supplement
If State Pension is being deferred, then extra State Pension won’t be accrued for the days the deferring person’s partner is getting any of the following benefits:
- Income Support
- Pension Credit
- Universal Credit
- Employment and Support Allowance (income related)
- Jobseeker's Allowance (income related)
Also, no extra State Pension will be generated for any days spent in prison.
Inheriting or increasing State Pension from a spouse or civil partner.
An extra payment on top of the new State Pension may be inherited if the client is widowed.
If they remarry or form a new civil partnership before reaching State Pension age, they won’t be able to inherit any additional pension from the previously deceased spouse.
Inheriting Additional State Pension
If your client married or entered a civil partnership before 6 April 2016, they can inherit part of their deceased partner’s Additional State Pension if one of the following applies:
- deceased partner reached State Pension age before 6 April 2016
- they died before 6 April 2016, but would have reached State Pension age on or after that date.
Additional inherited pension will be paid along with your client’s State Pension.
Inheriting a protected payment
If a partner dies, half of his protected payment can be inherited if marriage or civil partnership began before 6 April 2016 and:
- the dead partner’s State Pension age was on or after 6 April 2016
- they died on or after 6 April 2016.
Again, additional inherited pension will be paid with your client’s State Pension.
Inheriting extra State Pension or a lump sum
Part or all of a deceased partner’s extra State Pension or lump sum can be inherited if:
- they died while they were deferring their State Pension (before claiming) or they had started claiming it after deferring
- they reached State Pension age before 6 April 2016
- client and deceased partner were married or in the civil partnership when they died.
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