Interactive Investor

State pension divide: how much will you get?

9th February 2023 14:35

by Alice Guy from interactive investor

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The state pension isnt the same for everyone and older pensioners often get less. Alice Guy explains.

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The state pension is rising to £10,600 in April, climbing 10.6% in line with the triple lock from its previous level of £9,628. But in reality those figures only tell part of the story. Actually, only a minority of retired pensioners enjoy a state pension income at that level.

There’s currently a two-tier state pension system with older pensioners often getting a lot less than their younger friends. Pensioners on a basic old state pension will get only £8,121 in April, rising from £7,376, making it harder to afford spiralling living costs.

Here, we take a look at the old and new state pension systems, why older pensioners get less and if it’s possible to top up your state pension.

New state pension system

In 2016, the government brought in a new, shiny simplified state pension system.

On the plus side, the new state pension is a lot simpler. Everyone retires at the same age and is due the same amount, assuming they’ve built up enough National Insurance contributions. And many people get significantly more under the new system: £9,628, compared to £7,376 for those currently on an old basic state pension.

The old state pension system did include an additional earnings-related element, boosting many people’s income (this extra payment was also known as SERPs - state earnings-related pension scheme). Nevertheless, those on the old state pension still receive less on average than the new system: £162.92 per week on average compared to £173.60, according to Office for National Statistics (ONS) figures.

As for the negatives, people now have to wait longer for the new state pension. The state pension age rose from 65 to 66 in 2020, and will rise again to 67 in 2028 and to 68 as soon as 2034.

It’s worth mentioning that some women on the old state pension also saw their state pension age increase significantly. Between 2010 to 2018, women’s state pension age rocketed from 60 to 65, reflecting the fact that many women now work for longer, but also leaving many struggling as they were suddenly facing a huge drop in expected income.

The fiddly state pension rules under the old system left many people scratching their head and they're still missing out on money they could be entitled to. For example, more than 230,000 older women are thought to have been underpaid, as under the old system they were entitled to part of their husband’s state pension in certain circumstances.

Two state pension systems

Old system

New system

State pension age

65 for men, previously 60 for women (increased from 60 to 65 between 2010 to 2018)

Now 66 for everyone and will rise to 67 in 2028. 65 before 2020 and (women retiring between 2016 to 2018 had slightly earlier state pension age)

Number of years worked to get full state pension

30 years for some, 45 years for others

35 years for everyone

State pension amount

£7,376 for basic state pension, rising to £8,121 in April 2023

Additional state pension for some workers

£9,628, rising to £10,600 in April 2023

Deferring state pension

10.4% for every year you defer your state pension

5.8% extra for every year you defer your state pension

Additional state pension

Some workers “contracted out” meaning they paid lower National Insurance contributions but only get the basic state pension

One simple flat state pension with no additional rate

Claiming based on spouse’s National Insurance contributions

Widows or widowers may due a higher state pension based on their partner’s National Insurance record.

No transfer of entitlement possible.

How to boost your state pension

Although the new state pension is a flat amount, there are some ways you may be able to boost your state pension income.

Check your record

The best place to start is by checking your existing state pension forecast on the government website. It’s quick and simple and you’ll be able to see if you have any gaps in your National Insurance record. Once you’ve got a full 35 qualifying years, there’s nothing more to do as any extra years won’t add to your state pension income.

Backdating National Insurance contributions

To get a full state pension, you’ll need to have 35 qualifying years where you’ve paid National Insurance. If you have between 10 and 35 years of qualifying years, then you’ll get a proportion of the state pension: 1/35th for every qualifying year.

Paying backdated voluntary National Insurance contributions can help you plug any gaps in your NI record and potentially boost your state pension income. Be careful though, because if you’re only part-way through your working life, you could still end up with enough National Insurance contributions, so paying for extra years might be a waste.

At the moment, voluntary class 3 NI contributions cost £824.20 for one year and could boost your state pension by £275 each year, increasing your income by around £5,000 over your whole retirement on average. It’s an amazing deal because it will take only four years to recoup the cost and your investment will hopefully keep paying dividends to a ripe old age.

You can usually only pay for gaps in your National Insurance record from the past six years, but at the moment there’s a special deal, until the end of the tax year, where you’re allowed to backdate additional contributions for 16 years (check here to see if you’re eligible and how it works).

Deferring the state pension

If you don’t need your state pension straight away, you might be able to boost your income by deferring it. Your state pension will increase by 1% for every nine weeks you delay taking it and 5.8% for a full year’s deferment. It’s not such a good a deal as under the old state pension system and you’ll have to live for 17 years to recoup your original lost pension income.

Here are details of how it works and how to do it.

National Insurance credits

You can get National Insurance credits to boost your state pension entitlement for various things including looking after a child under 12, claiming benefits due to ill health or unemployment, being on an approved training course and caring for a disabled person.

It’s also possible to get extra National Insurance credits for caring for your grandchildren, check here for more details.

It’s worth checking your record for any National Insurance credits, as missing credits can be backdated in some cases.

Annoyingly, you won’t get a National Insurance credit for caring for children if you didn’t claim child benefit. That why it’s important to still claim child benefit even if you need to pay it back later due to the high income child benefit charge.

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