How the State Pension works

Finding your way around the State Pension maze can be really daunting, but it’s vital to try to get to grips with the basics so you know how much you could be entitled to.

The State Pension age rose to 66 for both men and women on 6 October 2020, so will apply to anyone born after 5 October 1954. It is due to increase again to 67 between 2026 and 2028, and again to 68 between 2037 and 2039.

The women’s state pension age rose to 65 in 2018, and has now also increased to 66 to bring it in line with men’s state pension age, causing huge hardship for many women who assumed they’d be able to stop work aged 60. The Court of Appeal recently ruled that women hit by the rise in the state pension age haven’t been discriminated against and that they won’t be reimbursed for the payments they’ve missed. Find out more here.

Not everyone gets the same amount from the State Pension – how much you’ll get will depend on your National Insurance Contribution record and whether you decide to claim it as soon as you can, or to defer it for a while.

Here’s what you need to know.

The type of State Pension you’ll get depends on when you were born

There are two types of State Pension, the new State Pension and the basic State pension.

  • If you’re a man born on or after 6 April 1951, or if you’re a woman born on or after 6 April 1953 new State Pension rules will apply to you.
  • If you’re a man and were born before 6 April 1951, or if you’re a woman born before 6 April 1953, you’ll likely be claiming the basic State Pension already.

The new State Pension explained

The new State Pension applies to those reaching retirement age on or after 6 April 2016 and is £175.20 a week in the 2020/21 tax year. This is up from £168.60 a week in the previous 2019/20 tax year . In 2021/22, the State Pension will increase by the highest of the growth in wages, inflation as measured by the Consumer Prices Index (CPI), or 2.5%.

You’ll only be eligible for this amount if you’ve made 35 ‘qualifying years’ of National Insurance Contributions.

You’ll get qualifying years every year you’re in work, earning above a minimum amount (£183 a week in the 2020/21 – or if you’re paying voluntary National Insurance contributions. You may still get a qualifying year if you earn between £120 and £183 a week from one employer. You can also get National Insurance credits if you’ve taken time out of your career to bring up children or look after someone who’s ill or disabled.

If you’re self-employed, you’ll make Class 2 National Insurance contributions, which for the purposes of your State Pension are treated the same as employee contributions. Class 2 National Insurance contributions are payable if your profits are above a certain amount (£6,475 in 2020 to 2021). You pay both Class 2 and Class 4 National Insurance contributions when your profits rise above £9,500.

If you don’t have 35 qualifying years of National Insurance contributions, you’ll get an amount based on the number of years you have paid in, unless you’ve got less than 10 years of contributions, in which case you won’t normally qualify for any State Pension.

You can find out how much State Pension you’re on track to receive by requesting a State Pension statement.

When can I start claiming my State Pension?

You can find out when you’re eligible to claim your State Pension here. Bear in mind that the State Pension age is under review and is gradually being pushed back so that it’s in line with rising life expectancy. It’s due to increase to 67 by 2029 and then again to 68 between 2037 and 2039.

Buying extra years

If you’re missing some NI qualifying years, you can buy extra years by making what are known as ‘voluntary class 3 NI contributions’ to make up your record. You can buy up to 10 years’ contributions and the rate is £15 per missing week of NI contributions, so it’ll set you back £780 for a full year. This will boost your pension by just under a fiver a week, or around £250 a year.

Deferring the new State Pension

You don’t have to start claiming your new State Pension as soon as you reach State Retirement age.

You can defer it if you want to, which will mean you end up with a higher pension when you do start claiming it. It will increase every week you defer, as long as you defer for at least nine weeks.

For each year you defer, you’ll get just under a 5.8% increase in your State Pension. So, for example, if you deferred your pension for 52 weeks, you’d get an extra £10.16 a week (just under 5.8% of £175.20).

However, if you’re claiming certain benefits, you can’t get any extra State Pension and deferring might also affect the amount you can claim. Find out more about deferring your State Pension here. Get in touch with the Pension Service if you need further help or guidance.

The basic State Pension explained

The most you can get from the basic State Pension (in the 2020/21 tax year) is £134.25 a week. This is up from £129.20 a week in the previous 2019/20 tax year, an increase of £5.05 a week.

You’ll only get this amount if you’ve got a total of 30 qualifying years of National Insurance contributions or credits. If you don’t have 30 qualifying years, you may be able to pay voluntary National Insurance contributions so that you can claim the maximum basic State Pension.

Deferring the basic State Pension

If you’re under the old State Pension system and have chosen to defer your pension, you’ll get a 10.4% increase in your State Pension for each year you defer. For example, if you defer your basic State Pension for 52 weeks, you’ll get an extra £13.96 a week (10.4% of £134.25).

Your State Pension will increase every week you defer, as long as you defer for at least five weeks.

The Additional State Pension

If you’re a man born before 6 April 1951 or a woman born before 6 April 1953, then you might be entitled to an Additional State Pension on top of your basic State Pension. This is usually paid automatically with your basic State Pension if you qualify for it, unless you’ve previously chosen to contract out of it. The amount you’ll get depends on the number of years you paid National Insurance for, your earnings, and whether you topped up your basic State pension (which it was only possible to do between 12 October 2015 and 5 April 2017), but the maximum you can get in addition to your basic state pension in the 2020/21 tax year is £179.41 a week.

Again, you can find out how much you might be able to get from the Additional State Pension by requesting a State Pension statement.

If you did contract out of the Additional State Pension, then when you retire, you’ll get a contracted-out pension from your employer’s workplace pension scheme. This is typically the same as or more than you would have got if you didn’t contract out, although the actual amount you’ll get will depend on how your pension has performed.

How your State Pension is taxed

Your State Pension is paid to you before any tax is taken off (this is known as being paid gross). The amount you can earn tax-free each year, known as your personal allowance, is £12,500 for the 2020/21 tax year, meaning that if the State Pension is your only source of income, you won’t have to pay any tax on it.

However, if you have other income coming in, perhaps from an employer or from other pensions, and this income is more than your personal allowance, you’re liable to pay income tax on any amount above the allowance. Different rates of income tax apply depending on the type of income and how much it is.

Either your employer or pension provider will need to take income tax off the amount they pay you, as well as any tax due on your State Pension. They’ll usually pay this to the taxman on your behalf. If you’re not working, but have pensions from more than one provider, such as a personal pension and a workplace pension, HMRC will ask one of these providers to deduct tax due on your State Pension.

If you plan to keep working beyond your State Pension age, then the tax impact of claiming your state pension, alongside receiving other paid income, may be a factor worth considering when making a decision on whether or not to defer taking your State Pension.

You can find out more about how your State Pension is taxed from the Pensions Advisory Service.

Remember to claim your State Pension

Many people forget that you don’t get your State Pension automatically – you have to actively claim it. You’ll usually be sent a letter a couple of months before you reach State Pension age which will tell you what to do. If you haven’t received a letter for some reason, or if you have misplaced it, you can also claim online or over the phone. And remember – you can still claim your pension (or choose to defer it), even if you want to continue working.

 

Have you recently started claiming your State Pension or does the change to the State Pension age mean you have to wait longer? If so, we’d be interested in hearing from you. You can join the conversation on the Rest Less community or leave a comment below.

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33 thoughts on “How the State Pension works

  1. Avatar
    Susanna Burke on Reply

    I get £35 Per month deducted off my state pension because I receive £35 a month from a pension scheme my late husband had.
    Should this be happening?

  2. Avatar
    Anonymous on Reply

    Thanks, really clear.
    Do you have any information on the situation if one has 32 years in UK and a further 8 years contribitions in Rep of Ireland
    Can they be combined or collected separately
    Thanks

  3. Avatar
    Kevin Foster on Reply

    This was a helpful list of details. However, was surprised to red you needed 35 qualifying years. I understood this to be only 30 years….

  4. Avatar
    Linda on Reply

    If you worked without a break until 58 yrs of age but only paid class B married woman contribution what pension per week can you expect? If you deferred having your pension for four years? until 62.

    1. Avatar
      Lorraine Mccoll on Reply

      Linda I dont know what age you are now but you are not getting your pension till at least 66. I dont know why you think 62??? You need to join a pension group on facebook or ask about it.

  5. Avatar
    Mrs W Stevenson on Reply

    Excellent article on the state pension and entitlements. I was previously informed by a Government Agency that I needed to have 38 qualifying years before I would be entitled to the full £175.20 a week, I will enquire again because that Agency said I would have to work another 4 years full time in order to obtain the full amount. I was ill health dismissed this year so didn’t manage to work those extra 4 years they suggested. It may have had something to do with the fact that it was my deceased husband’s contributions and mine added together which makes up my entitlement. It will be 2026 before I can claim my state pension.

  6. Avatar
    Carole on Reply

    Found this very clear & concise. I received my letter indicating how much I will get. However, what would have been useful would be if I could see how the Pensions Dept came to that sum.

  7. Avatar
    Paul on Reply

    Very good article which explains alot. It might also need to include the impact of being ‘contracted out’ whilst being part of a final salary scheme’ pre 2016.

  8. Avatar
    Heather Smith on Reply

    I get my pension in 2023. I paid for extra NI years to make this a full state pension. Just be aware I had one year required. There were two years when I didn’t pay full contributions, one I could have paid over £600 for and one I needed to pay £121 for. Check your missing years and pay the cheapest to get a full pension. In the meantime I am one of those women who had pension aged moved from 60 to 66, without a letter from the government telling me about this. But….that’s another story!

  9. Avatar
    Rob N on Reply

    Good to know you can ‘buy’ extra years. I’m three years short so will look in to it. One issue is beware just using the HMRC web tool for estimating pension you will get. You MUST contact the other govt department (Pension wise?)

    1. Avatar
      Julie Naismith on Reply

      Ask for a written statement Claire – I found the information online was wrong for me, I’ve also been contracted out most of my career. I will need 46 years contributions to get the full state pension. (Seems like we are being penalised for being sensible & paying into a company pension…..)

  10. Avatar
    John on Reply

    The 35 year NI contribution is misleading, I’ve 38+ years of contributions but because I retired early with a works pension I’ve been told I’m still short of qualified years for my full state pension.
    This is because I’ve not contributed since I retired from work even though I have 38+ years while working.
    I’ve managed to make up the last few years by claiming childcare for our grandchildren, but the 35 years isn’t that simple.

  11. Avatar
    Julie Naismith on Reply

    If you have paid into a “contracted out” pension scheme (most Defined Benefit schemes), you will find you need many more than 35 years to get the full new State Pension. I have 44 full years NI and still won’t get the full pension, unless I pay 2 more years voluntary contributions. The information online was wrong, so ask for a written statement, or you may think you’re due the full amount…..seems very unfair to me as the main benefit of contracting out was to my employer!

  12. Avatar
    Howard. on Reply

    The HMRC pension calculator shows very clearly how much pension I will receive and where the gaps in the NI payments are.

  13. Avatar
    Patricia Barry on Reply

    My sister in law should have received her state pension on her 66th birthday, but received it six months early. Anyone know why?

  14. Avatar
    Marianne Harvey on Reply

    You say: i f you’re self-employed, you’ll make Class 2 National Insurance contributions, which for the purposes of your State Pension are treated the same as employee contributions. Class 2 National Insurance contributions are payable if your profits are above a certain amount (£6,475 in 2020 to 2021).
    Question : what happens if you earn less than that and therefore do not contribute to NI, what will happen when you retire?

  15. Avatar
    Lynn on Reply

    I was told you have to have 40 years length Working contributions to get full stamp state pension by job seekers.This states 35?Maybe it changed recently?Good information to read .

  16. Avatar
    Anonymous on Reply

    I was made redundant in April 2016 have some health issues and am now 55 years old I am on universal credit I paid into the pension scheme at work for 10 years but have no idea how much it will give me as it is obviously not been having any payments in since being made redundant. I have to wait till I am 67 to get state pension but could claim work pension now. IOf I claim it now it will be reduced paymenst because it would have to last longer and according to government my official retirement is 67 so i have `12 years to go but it is due to rise again next year to 68 and it is going to keep rising, We all live much longer and the pension pot does not have enough funds for us all hence why they are raising te age and asking people not to retire unless necessary
    Mrs Heason

  17. Avatar
    Carole on Reply

    As a woman who worked many years.. Ran a family business and has cared for my elderly father for ten years, since mum passed away… I was incredibly disappointed that when I reach 60 next year in December.. The state pension I thought would provide a little security will not be an entitlement for a further 7 years… Whilst I’m fortunate to have a small private pension.. I worry about finances constantly.. & feel for those that would have been relying on this aged 60. Difficult times ahead for many I fear…

  18. Avatar
    Kevin Johnson on Reply

    Excellent article. Whilst on paper I qualify for the full pension, I spent over 95% of my career in the public service. I understand, due to my employer contracting out of SERPS, this will result in a reduction of my final pension. Taking the current weekly rate of £175.20 are you able to give me a very rough estimate of the rate I will personally receive. I appreciate this would only be a ball-park figure but currently I have absolutely no idea of the scale of reduction we are talking about. Thank you.

  19. Avatar
    Barbara on Reply

    I’m 63 and sue to claim in sept 2023. Have 44 full contribution years but gov.uk site says I have 4 years where I didn’t contribute enough. Says I should do nothing and they are looking into it. Does this mean I’ll get less than the £185.00 per week they forecast???

  20. Avatar
    Barbara Campini on Reply

    It might be worth you requesting a state pension forecast by completing a BR19 form on Gov.uk, takes around 10 days to come through. I did this and found it very helpful, I’m in a similar position to you.

  21. Avatar
    Debra on Reply

    ‘Specified adult child care credits’ can be claimed on the uk gov site where grandparents look after children under 12 due to the child’s parent working and paying their own NI. This helps to make up lost years in ‘stamps’ due to not earning enough or being contracted out to a company pension.
    Back payments can also be requested.

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