State Pension - Need to Knows

The new flat rate State Pension came into effect two years ago in April 2016, and has been paid to new pensioners since then. If you retired before then, you’ll continue to be paid under the old State Pension arrangements which included extras such as the Second State Pension (S2P).

The new State Pension aims to do away with the negative impact borne by women taking career breaks to look after young children, the self-employed and those giving up work to become carers and create a more equitable system. These groups now receive credits on their National Insurance (NI) records that usually mean full entitlement to the full state pension.

Gender gap remains
Research by Which found that among the half a million people receiving the new State Pension the typical man received £152 a week and the typical woman £144 a week (£8 a week, or £412 a year less)[1]. This difference can be explained by the transitional arrangements, whereby entitlements to State Pension add-ons that had been accrued, many of which were based on earnings, are honoured. In fact, former Pensions Minister Steve Webb has said it could take a decade for this gap to be eliminated.

NI credits
As we’ve mentioned there are measures in place designed to compensate the vulnerable groups, the self employed pay earnings-related Class 2 NI which counts towards State Pension entitlement, and can make voluntary Class 3 NI contributions in addition. Those who are caring for someone for 20 hours a week or more may be entitled to Carer’s Credit. If you’re in receipt of Carer’s Allowance you’ll get credits automatically, if not you can apply for it providing you meet the eligibility criteria (see gov.uk).

Child Benefit & higher earners
In a similar way to those in receipt of Carer’s Allowance, those not working but receiving Child Benefit also receive automatic NI credits during this time. Child Benefit is paid at a rate of £20.70 per week for the first child and £13.70 per week for second and subsequent children. But in 2013 new rules were introduced , meaning that if you (or your partner’s) individual income is over £50,000 and you claim Child Benefit you pay additional tax, and if earnings are more than £60,000 you’ll repay 100% of the Child Benefit you’re paid. This has resulted in a significant drop in the number of people claiming it that year and this continues to fall [2]. It’s easy to understand why it would seem pointless to claim something only to pay it all back in tax.

Hidden implications
By choosing not to claim Child Benefit, automatic NI credits for time spent out of work caring for children are lost. This is likely to affect women disproportionately as they tend to take time off to care for their young families. Full entitlement to State Pension requires 35 years of NI contributions. Research by Royal London found that women out of work for five years, could lose £23,000 worth of State Pension over a 20 year retirement 2. If your family is affected you can still choose to claim Child Benefit by submitting a claim form, but ticking the box which states you don’t wish to receive any payments, thereby protecting State Pension entitlement.

Fixing your NI record
You can backdate a claim for Child Benefit by 3 months, which might help you reclaim some lost NI credits, but you can’t backdate any further than that. You are free to make Class 3 Voluntary Contributions to fill gaps in your NI record by paying for missing years. In 2018-19 a year’s worth of NI contributions will cost you £761.80. You can normally go back up to 6 years to top up your NI record.

Private provision is vital
While maximising entitlement to State benefits in retirement is worthwhile, it’s important to remember that even the full State Pension equates to only £164.35 a week in 2018/19 – just over £8,500 a year. This demonstrates just how important private and company pensions are in providing adequate income in retirement.

 

[1] State pension gender gap ‘narrowing too slowly’, BBC news website, 20 April 2018

[2] Thousands risk reduced state pension, Stefanie Garber, Which? News website, 23 March 2018

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