Retirement Pension (The State Pension)

The State Pension is paid to people reaching the qualifying age. At present this is 60 for women and 65 for men, but this will be equalised (see section below). The State Pension consists of the following elements:

• Basic pension,
• Additional pension (also known as SERPS or State Second Pension),
• Graduated Retirement Benefit,
• Long-term Incapacity Benefit Age Addition,
• Age addition, and
• Extra pension for dependants.

Basic State Pension

The basic State Pension is dependent on National Insurance Contributions having been paid or credited. If you have not paid or been credited with sufficient contributions, you may have a chance to pay extra contributions to increase your entitlement. If you do not pay this extra, the basic pension is scaled down proportionately to the shortfall in your contributions.

If you have not paid or been credited with any contributions, you are not entitled to any State Pension, until you reach the age of 80. If you have not been employed or earning because you were bringing up children, or looking after a dependent relative, you may apply for Home Responsibilities Protection. This effectively reduces the number of years over which you were expected to make contributions, so that the full basic pension may be payable with a reduced number of years’ contributions.

A married woman who does not qualify for the full basic State Pension based on her own contributions can receive the full basic pension based on her husband’s contributions provided that:

• the husband is getting a basic pension, and
• the wife is aged at least 60.

A widow or widower may be able to get the basic pension and up to 50% of the additional pension based on their deceased spouse’s contributions.

• A widow or widower may also get 100% of their deceased spouse’s SERPS or Additional State Pension when the spouse dies, if they reached State Pension age before 6 October 2002.
• If they reached State Pension age between 6 October 2002 and 5 October 2010, the maximum SERPS or S2P inherited by the widow or widower is between 90% and 100%.
• If they reach State Pension age after 5 October 2010, the widow or widower will receive a maximum of 50% of the SERPS or S2P.

A divorced person who does not qualify for full basic pension based on his or her contributions may be able to get the full basic pension based on their former spouse’s contributions.

The basic State Pension is not affected by any earnings from working after your retirement date. However, a dependant’s earnings will affect your extra pension for dependants (see below).

If you or your dependant spouse are in hospital for 52 weeks, the pension will be reduced.

The pension is still payable if you go to live abroad.

Additional State Pension

This is an addition to the basic pension and is dependent on earnings related National Insurance Contributions paid by employees (known as Class 1 contributions). From 1978 until 2002, these additional contributions were called the State Earnings Related Pension Scheme (SERPS). From 2002, they were known as State Second Pension (S2P).

For Class 1 National Insurance purposes, your earnings are classified into three tiers – the lower tier (up to the minimum level at which NI is charged), the middle tier (where earnings are subject to NI contributions), and the upper tier (where employers – but not employees – pay at a higher rate). The earnings related contributions are calculated by reference to the middle tier. The benefit is also based on the middle tier earnings.

Self employed people do pay Class 4 contributions, which are earnings related, but these do not qualify for any additional pension.

Graduated Retirement Benefit

This is based on contributions made by employed persons between April 1961 and April 1975 under the graduated scheme – it was a sort of earnings related scheme. For every £7.50 paid by men, and for every £9 paid by women under this scheme, the benefit is £9.63 per week.

Long-term Incapacity Benefit Age Addition

If you were receiving Long Term Incapacity Benefit at any time within eight weeks of reaching retirement age, you will receive the age addition to your pension. However, if you get any additional State Pension (i.e. any increase above the basic figure) this additional amount will automatically reduce the Long Term Incapacity Benefit Age Addition.

Age addition

When you reach the age of 80, an additional 25p per week is added to your pension.

Extra pension for dependants

Your basic pension is increased for your husband or wife. Benefits for children are now made through Child Tax Credits, but if you were receiving extra State Pension for children as dependants before 6 April 2003, this will continue to be paid in the same way. The benefit is £9.55 per week for the oldest qualifying child, and £11.35 per week for every other qualifying child.

Rates of State Pension

The amounts of pensions are reviewed every year and the new rates come into force on the first pay day after 5 April each year. For the year ended 5 April 2005, the weekly basic State Pension is:

Based on your own or your deceased spouse’s National Insurance Contributions	£79.60
Based on your spouse’s contributions	£47.65
Non-contributory pension for over-80s	£47.65
Extra pension for dependant spouse	£47.65

Deferring the State Pension

On reaching the State Pension age you do not have to take the pension immediately. You may defer the pension. The pension is then increased by 1% for every seven weeks you have deferred it. The increase is therefore approximately 7.5% for deferring it for a whole year. You may only defer the pension for a maximum of five years.

Claiming benefit

You will normally be sent a form to claim your pension four months before reaching State Pension age. If you have not received it within three months of that date, you should get in touch with the Pension Service.

Getting a pension forecast

On approaching your State Pension age, you may write to the Pension Service to get a forecast of the pension you should receive. That forecast will also tell you if your contributions are not sufficient to entitle you to the full pension, and how much you may pay as additional voluntary contributions to qualify you for the full basic pension.

Other benefits

The Winter Fuel Payment is paid to all people from age 60, regardless of whether they are receiving a pension or not.

A Christmas Bonus of £10 is paid in December to all pensioners.

Cold Weather Payments of £8.50 are made for each period of extreme cold weather, to all pensioners who are receiving the guarantee credit element of the Pension Credit (see below).

Free prescriptions and free eye tests are available to all people from age 60, regardless of whether they are receiving a pension or not.

Minimum Income Guarantee and The Pension Credit

The Minimum Income Guarantee was introduced in the 1999 budget, and finally became effective in October 2003. It was designed to reduce poverty amongst pensioners and also to reward people who have saved for retirement. The Pension Credit consists of two main elements:

Guarantee Credit. This ensures a minimum level of income for all people aged 60 and over.

Savings Credit. This provides extra income for people aged 65 and over who have made some provision for their retirement by having a small private pension or some savings in other forms.

People can qualify for both elements, or each element separately. This depends on the age and income of the claimant and partner.

The two elements work together so that entitlement is different for the age groups below.

Pension Credit from ages 60 to 64

For couples, only one partner needs to be 60. It guarantees a minimum level of income by topping up people’s weekly income. It is available to people with incomes below the following limits:

Single person	£105.45 per week (for the 2004/2005 tax year).
Couples	£160.95 per week (for the 2004/2005 tax year).

However, if the claimants are:

• severely disabled, or
• looking after a person who is severely disabled, or
• have housing costs such as mortgage interest payments,

then the income limit is raised.

The Credit works simply by topping up the income to the figures given above.

Pension Credit from age 65 onwards

For couples, only one partner needs to be 65. This is available to people with incomes below the following limits:

Single person	£144.00 per week (for the 2004/2005 tax year).
Couples	£212.00 per week (for the 2004/2005 tax year).

However, if the claimants are:

• severely disabled, or
• looking after a person who is severely disabled, or
• have housing costs such as mortgage interest payments,

then the income limit is raised.

From age 65 onwards, the Savings Credit rewards pensioners who have contributed to a second pension scheme or who have savings. The extent of this reward is 60p for every £1 for income above the level of the basic State Pension, with a maximum of £15.51 per week for a single person and £20.22 per week for a couple (for the 2004/2005 tax year).

The formula for working out the weekly Pension Credit for the 2004/2005 tax year is as follows:

• Where the income does not exceed the full basic rate of State Pension, the pension credit is:

Single person	£105.45 less actual income.
Couple	£160.95 less actual income.

• Where the income exceeds the full basic rate of State Pension, the pension credit is:

Single person	(£105.45 less actual income) + [0.6 x (actual income less £79.60)].
Couple	(£160.95 less actual income) +[0.6 x (actual income less £127.25)].

The Pension Credit depends on the claimant’s income. Therefore, any changes in income must be reported to the Pension Service. However, if the claimant (and their partner if claiming as a couple) is or are both over 65, the retirement income for the purposes of calculation of the Pension Credit is fixed for five years. This is called the Assessed Income Period (AIP). Retirement income for these purposes is defined as:

• any private pensions from an employer’s scheme or private scheme,
• annuities, and
• income from savings and investments.

However, if the income other than retirement income changes, then this must be reported to the Pension Service, even if it is in the five year period. If the claimant’s income is reduced at any time, they can ask for a reassessment.

Other events which must be reported to the Pension Service are:

• Change in marital status or co-habitation status.
• The claimant or partner reaching the age of 65.
• No longer satisfying a condition of the Pension Credit.
• Retirement income reduces or is ceased temporarily.
• Entering a care home other than temporarily.

Equalisation of retirement ages

From 6 April 2020, the State Pension age will be 65 for both men and women. The age for women will start to change gradually from 2010.

Thus, women born before 6 April 1950 will not be affected. Their State Pension age will continue to be 60. The gradual changes will affect women born between 6 April 1950 and 5 April 1955. Women born after that date will have a State Pension age of 65.