State Pensions Make the most out of retirement

It's possible to boost the amount of the basic state pension you'll get, in some cases adding many thousands of pounds over the years, by paying just a few hundred quid now.

This is a full 2013/14 tax year Q&A; guide to getting the most out of the state pension and pension credit.

Also read the
Benefits Check-up Guide

The basic state pension isn't a simple beast...

It's an old saying that there are only two people in the UK who understand the state pension, but sadly one is dead and the other isn't sure he truly gets it. We've worked hard to make this guide easy to understand & accurate (even getting the govt department responsible to fact check). So please feedback to us, include anything that doesn't make sense or tell us where more info's needed.

IMPORTANT! This guide is based on current pension rules in 2013-14. The Government has announced radical changes to the state pension to create a flat-rate state pension (more details of which were announced in January 2013 - see the State pension reform MSE News story). The new flat-rate pension will be introduced in April 2016.

What is the state pension?

The basic state pension is a government-administered scheme, funded by national insurance (NI) contributions, to give those who have reached the Government-defined retirement age a guaranteed weekly income, currently just over £110 a week. The most important thing to understand is, for those who qualify…

The basic state pension is NOT means tested. It doesn't matter what your former salary was or how much you've got in savings.

Instead, the amount you receive depends on a number of factors, most importantly the amount of national insurance you've contributed over the years and the age you start collecting it. Therefore for some, it's possible to massively boost what you receive by making small additional top up contributions or delaying the start of your pension.

To make the decision, it's important to first understand how the state pension works. The questions below will take you through that, then it's time to work out if you can pension-boost.

Also note that the pension credit benefit is a top-up available to many on low incomes or with limited savings, yet many miss out. It is easy to do a quick Benefits Check to ensure you're getting what you're entitled to.

There's also a second state pension which only some people qualify for and works completely differently, that's beyond the scope of this guide, but read a quick briefing

How does the basic state pension work?

It is a set weekly income until death that you can get once you reach the official retirement age. Don't assume absolutely everyone gets it. There are a number of exclusions, the biggest of which will be if you've not paid enough national insurance throughout your adult life.

When do I get the state pension?

You qualify at the Government's official retirement age, which depends on when you were born, and your gender, though you needn't start taking the pension at that point. The official retirement age is gradually being raised so while many women currently get it at 60 and men at 65, in a few years, this will rise to at least 66 for both by 2020, and possibly to 68 later on.

The state pension age for men and women

Born	Official retirement age
Male
Before 6 December 1953	65
On or after 6 December 1953	It will rise from 65 to 66 between December 2018 and April 2020
Female
Before 6 April 1950	60
On or after 6 Apr 1950	The current State Pension is increasing from 60 to 66 by April 2020.

To find your exact retirement age see the
Govt's State Pension Age Calculator

How do I claim it?

The Pension Service should automatically send you a claim form four months before you reach the official retirement age. Your pension is paid directly into your current account. If you don't receive the forms, call 0800 731 7898.

Who qualifies for the basic state pension?

To get the FULL state pension you'll need to have worked for most of your adult life and paid national insurance (NI) contributions or been on qualifying benefits.

The amount you're entitled to is calculated by the number of NI qualifying years you've accumulated. Again, the qualification criteria changes with the year you were born.

If you have a shortfall you will receive a letter from HM Revenue and Customs once a year to inform you of it.

What is a qualifying year?

To gain a qualifying year, you need to earn a set minimum during a tax year (April to April) and pay the required national insurance. For 2013-14, this is £5,668 for employees or £5,725 for the self-employed. In past years, the amount was, of course, lower, but it has always been at a similar figure in relation to average salaries. So only those on very low wages may have missed out.

So if you were working full time, even on the minimum wage, or even just a few days a week throughout the year, it's likely you earned a qualifying year.

What about full time parents & those who can't work?

Here, you may be eligible for National Insurance (NI) credits, which counts as a qualifying year.

• National Insurance (NI) Credits
  
  These are normally automatically awarded for the weeks you were claiming and receiving any of the following benefits: carer's allowance, jobseeker's allowance, incapacity benefit, employment and support allowance.
  
  You also get them if you are a full-time parent who claims child benefit for someone under 16, or a full-time carer who claims income support. However, foster carers and others may have to claim it ( find out more ). Until 5 April 2010, these were called home responsibilities protection (HRP). Years of HRP built up before then will count as qualifying NI credits

How many qualifying years do I need?

This depends on gender and when you hit retirement age, as the amount needed reduced in 2010 and will change again in 2016.

• Qualifying years for Men.

  If you'll reach state pension age between 2010 and 2016 you'll need 30 qualifying years to get the FULL basic pension.

  If you reached state pension age in 2010 or before you needed 44 years. And if you reach pension age in 2016 or later, you'll need 35 years.

  
  

• Qualifying years for Women.

  If you'll reach state pension age between 2010 and 2016 you'll need 30 qualifying years to get the FULL basic pension.

  If you reached state pension age in 2010 or before you needed 39 years. And if you reach pension age in 2016 or later, you'll need 35 years.

  
  

Don't have enough qualifying years?

You may still be entitled to a PARTIAL state pension but it depends on when you hit retirement age and how many qualifying years you have.

• Retirement age hit BEFORE 6 April 2010.
  
  If you've fewer than 25% of the qualifying years then you're not entitled to a basic state pension. If you have 25% or more, you'll get an approximate pro-rata weekly income. In other words, if you've half the qualifying years you'll get roughly half the full state pension.
  
  However, if you don't qualify for the basic state pension and have no other income you're usually eligible for pension credit which ensures you receive a guaranteed minimum income. Plus, if you're over 80 and qualify for less than £66 a week, you'll still get a minimum £66.
• Retirement age hit on or AFTER 6 April 2010.
  
  If you have at least one qualifying year, you'll get a thirtieth of the full amount for each qualifying year. Therefore, if you've eighteen qualifying years you'll get 18/30th (three fifths) of the FULL State pension.
• Retirement age hit in 2016 or AFTER.
  
  You will need to have at least 10 qualifying years to get anything, but this will only entitle you to £41 per week. If you have between 10 and 35 qualifying years, you'll get a pro-rata rate - so if you've 25 years, you'd get £102 (25/35ths of the FULL flat rate pension of £144).

Yet if you haven't got other income or savings, this doesn't mean you won't get any more from the state. The Pension Credit benefit guarantees a minimum income for those with little earnings.

How much will I get?

There's a complicated maze surrounding the amount you get, but a brief summary (figures valid until 5 April 2014) is as follows:

If you're a woman who hasn't qualified for the basic state pension, but your husband is already claiming, there's a special basic couples pension you could get once both of you reach retirement age. If both partners qualify for the basic pension in their own right and their total individual pensions are more than what they'd get as a couple, they get that larger figure.

These figures are only rough guides as many other variables come into play. You can try Gov.UK's calculator for an indication. The best way to find out is to phone on 0800 731 7898 (option 1).

There's another crucial fact to remember...

The basic state pension is taxable, but alone, is under the threshold before being taxed. Yet for those with other income, it counts as taxable earnings.

If you defer your pension (more information in a moment), any lump sum income you take is taxed differently.

Will pension income affect my benefit entitlement?

Yes. A pension counts as any other income so will affect your entitlement to pension credit, housing benefit or council tax support. See the Benefits Check-up guide.

Does the Basic State Pension award increase every year?

Yes. It rises every April. The amount of the increase is based on the previous September's inflation rate (based on the Consumer Prices Index), average earnings increase, or 2.5%, whichever is the highest.

What happens when I die?

Your basic state pension cannot be passed to someone else when you die. Though if you delay claiming your state pension, your widow, widower or surviving civil partner may be entitled to some of the cash.

If you have contributed towards the second state pension, your spouse or civil partner can inherit some of this, though it depends on when you were born. If you've no spouse or civil partner, any state pension you put off claiming becomes part of your estate. Find full details on the Gov.UK website.

Your surviving partner may be entitled to a one-off bereavement payment or bereavement benefits for a year. Get details on this from Gov.UK.

What's pension credit?

1.5 million on low incomes eligible for Pension Credit don't claim. To check if you're eligible call 0800 99 1234.

Pension credit is an extra payment that guarantees most people over 60 a minimum income, yet many don't realise they're missing out on cash they're entitled to.

While pension credit is for those with low incomes you may be eligible even if you have tens of thousands of pounds in savings.

Say you're single and earn no salary or private pension and just get the full basic state pension, you'd be entitled to some pension credit if you have up to £50,000 in savings.

If you're a couple receiving the £176.15 per week basic pension, you could get some pension credit with up to £62,000 in savings.

The benefit comes in two parts:

• The minimum income guarantee

  For single pensioners with weekly income (including pension) below £145.40, the pension credit will top you up to £145.40.

  If you have a partner and your joint weekly income is below £222.05, it'll top you up to £222.05.

  If you pay mortgage interest or have other housing costs, or if you've caring responsibilities, or are severely disabled, you may be entitled to even more pension credit.

• The savings credit element (for those 65 and over)

  It is a reward for those with a modest income who have saved for retirement. After all, if saving means you end up with little more than those who don't save, it'd discourage people from providing for themselves.

  For a single pensioner with weekly income (including pension) up to £189 a week you may be entitled to up to £18.06 a week extra.

  For a couple with joint weekly income up to £277 a week you may be entitled to up to £22.89 a week extra.

To check your full pension credit entitlement, use the
Govt Calculator

What counts as weekly income?

Any income from work is, of course, treated normally, so if you earn £10,000 a year, that's what goes down on your file.

When it comes to savings and investments the situation is a bit more complex. This means any money saved or invested in your name, or investment properties (ie, excluding the home you live in.)

• The first £10,000 doesn't count. You're allowed to have that sum saved without it impacting your pension credit at all. This is a big boon as the majority claiming pension credit have little more than this saved.
• Above £10,000. Here, it's assumed you earn £1 a week per £500 of saving, which works out at 10.4% interest. This is completely unachievable in any savings account now, and virtually unachievable at any point in recent memory. If it were an investment, it would need to be doing seriously well.
  
  It can only be presumed an assumption of a gradual use of capital has been factored into this calculation, plus the initial 'free' £10,000.

What if my investment drops in value?

The amount you initially declare you have stays on your file and is calculated at that rate going forward unless you let the Pension Service know. Therefore, if you spend your savings or the value of your investment drops, it's important to notify the Pension Service and have the amount you're entitled to recalculated as soon as possible. You should then receive the increased benefit as soon as your paperwork is processed. You can do this by calling 0800 99 1234.

Should I delay taking my pension?

You can put off claiming your basic state pension. This can be especially useful for those still working as it can mean a larger annual pension payout later. You can also defer receiving payments once you've already started claiming, though you can only do this once.

If you choose not to take your pension, the benefit comes in one of two ways.

• Choose a bigger pension later.
  
  For every five weeks you delay claiming, your future weekly allowance is increased by 1%. So delay for a year and you get the full pension plus 10.4% extra. Though the amount isn't compounded so you don't get the increase on the increase.
• Get it as a lump sum.
  
  As long as you've deferred for at least a year, and began to defer after 5 April 2005, you can choose a lump sum. This is made up of the deferred payment plus interest at 2% above base rate (this time it is compounded). After collecting the lump sum, you then get the standard pension. Any lump sum payment cannot push you into a higher tax bracket so will be taxed at the same rate as your other income.

Is it worth deferring to increase the payout?

The answer to this, unsurprisingly, isn't simple. It is SOMETIMES worth deferring as you may get a larger overall payout. In general, the longer you live the more beneficial it becomes, so it's a decision you'll need to make based upon your circumstances and it is a bit of a gamble.

If you'd like to defer, contact the Pension Service on 0800 731 7898 (option 1).

The impact of deferring a pension

	Deferring for 2 years			Deferring for 5 years
If you live for another...	Pension you'd receive by NOT deferring	Pension you'd receive by deferring	Benefit to deferring	Pension you'd receive by NOT deferring	Pension you'd receive by deferring	Benefit to deferring
2 years	£9,620	£0	-£9,620	£9,620	£0	-£9,620
5 years	£25,500	£19,200	-£6,300	£25,500	£0	-£25,500
10 years	£56,600	£56,800	£200	£56,600	£47,200	-£9,400
15 years	£94,400	£102,000	£7,600	£94,400	£104,700	£10,300
Notes: 1.This assumes pension rates rise by 4% a year and the current criteria remain in place. It's possible neither will happen. 2.Based on someone reaching retirement age in April 2008 who chooses a larger pension

How long will I live?

Twelve years, six months, and 7 days … only joking. There's no crystal ball that can tell you this. However, according to the Office for National Statistics, a healthy 65-year-old man is expected to live, on average, for another 18 years and a 65-year-old woman is expected to live for another 21 years.

So the odds suggest many are better off deferring a few years, though, by definition, some always fall short of averages. Yet if you took your pension early, without spending it, it'd be earning some interest in the bank. That shows why it's important to carefully consider your options.

How do I pay to boost my pension?

Some can massively boost what they get each week, by making an additional payment to ‘buy’ missed past NI years.

We have written a separate guide on Boosting Your Basic State Pension, including the unique State Pension Boosting Calculator.