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.

Not everyone gets the same amount from the State Pension – how much you’ll get will depend on your National Insurance Contribution record, your age, 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 £168.60 a week in the 2019/20 tax year. This is expected to rise by 3.9% from April 2020, bringing the new weekly amount to £175.20, an increase of £6.60 a week.

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 (£118 a week in the 2019/20 tax year if you’re employed and £123 a week if you’re self-employed) – or if you’re paying voluntary National Insurance contributions. 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 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?

The date on which you can start claiming your State Pension depends on your age. You can find out when you’re eligible to claim here. Bear in mind that the State Pension age is gradually being pushed back. It’s due to increase to 66 for men and women by April next year and then 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 £9.74 a week (just under 5.8% of £168.60). You could get more once the State Pension increases in April 2020.

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. 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 2019/20 tax year) is £129.20 a week. This is expected to increase to £134.25 a week from April 2020, 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 £13.44 a week (10.4% of £129.20) but you’ll get more if you defer after the State Pension increases in April next year.

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 2019/20 tax year is £176.41 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 2019/20 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.

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