The State Pension: two separate systems

Paul Squirrell looks at the differences between the old and new State Pensions and the options open to clients should they wish to boost their entitlement or defer their State Pension.

The first State Pension in the UK was introduced in 1909 and the lucky recipients received just five shillings (25p) a week once they were over the age of 70. Thankfully, the amount has increased considerably since then and a person can now receive up to £168.60 per week under the latest scheme. As such, the State Pension remains an important element of most people’s income in retirement. However, someone's entitlement and the exact amount paid depend on various factors and the picture is clouded by the fact that the State Pension changed in 2016.

Those who reached State Pension age before 6 April 2016 fall under the old ‘basic State Pension’ system. Anyone reaching State Pension age on or after this date qualifies for the new ‘single tier’ State Pension (effectively men born on or after 6 April 1951 and women born on or after 6 April 1953). There are a number of key differences between the two systems, although transitional arrangements aim to ensure that no one is disadvantaged by the move to the new rules.

The main differences are as follows:

  1. The maximum payment for the new State Pension is currently set at £168.60 per week as opposed to £129.20 for the old scheme. However, the annual increase for both schemes is based on the government’s ‘triple lock’ commitment. This guarantees to increase the State Pension each year by a minimum of either 2.5%, the rate of inflation (CPI) or the rate of average earnings growth
  2. It was possible to boost a pension under the old system through the additional State Pension. This extra payment can be based on contributions made to three separate schemes – the State Earnings Related Pension Scheme (SERPS), the Second State Pension and the State Pension top up. These were in place at different times and a person may have contributed to more than one (as well as the Graduated Retirement Benefit scheme, which preceded the additional State Pension)
  3. 35 qualifying years of National Insurance (NI) contributions or credits are needed in order to obtain the full State Pension (30 qualifying years were needed previously)
  4. At least 10 qualifying years are needed to be entitled to any amount (only one year was needed under the old system from 2010/11)
  5. It is no longer possible to claim based on spouse's/civil partner's NI record (except if covered by transitional protection). In most cases, therefore, entitlement to the new State Pension is based entirely on the person own contribution record.

This last point is very important. Under the old system, if a spouse/civil partner hasn’t made enough NI contributions to qualify for at least 60% of the basic State Pension, it may be possible for them to claim a pension based on their spouse’s/civil partner’s NI contribution record. The old rules still apply if the person reached State Pension age before 5 April 2016, but they can only use their spouse’s/civil partner’s NI contributions made up to and including 2015/16 to improve their entitlement.

Checking and boosting your client’s entitlement

Your clients can check their entitlement to the State Pension through the government’s online service or by requesting a statement. An estimate is given based on their current NI contribution record and on the assumption that they’ll make contributions up until they reach State Pension age.

If they have a shortfall in their NI record, meaning they may not qualify for the full State Pension, they can consider making voluntary contributions (eligibility rules apply). They can also increase the amount they’ll receive by choosing to delay their claim (this is known as deferring their State Pension). This isn’t an option if they’re on certain benefits or living overseas though. Deferment is normally possible even if they’re already claiming their State Pension, although this can only be done once. The increase they’ll receive depends on when they reached State Pension age (the system is more generous for those who reached this age before 6 April 2016).

The State Pension – a technical guide

Here we examine in greater details the differences between the old and new State Pensions and the options open to clients should they wish to boost their entitlement or defer their State Pension.

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Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations.

This article represents a summary of our understanding of the law at the date of its last review (May 2019). Tax limits, benefits, allowances and rules are often subject to change and may change in future. Advisers and individuals should check that tax limits, allowances and rules have not changed. The value of benefits depends on individual circumstances. Withdrawals from a pension will not normally be possible until age 55.

Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

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