Don’t get caught out with the rules around your state pension

The new State Pension was introduced in 2016, and with that came a major shake-up for people who reached state pension age on or after 6 April 2016.

State pension rules before 6 April 2016

If you reached state pension age before 6 April 2016, the rules surrounding the state pension were somewhat confusing. There were two parts to the old state pension, the basic State Pension and the additional State Pension, as well as being able to contract out of the additional State Pension and put the money in a private pension of your choice, which added many complications to working out your entitlement. Entitlement to the basic State Pension and the additional State Pension were worked slightly differently to each other, and it was possible to build up entitlement under either both parts, or just the basic State Pension. The full basic State Pension amount is £141.85 per week in the 2022/23 tax year.

If married, or in a civil partnership, where both of you reached state pension age prior to 6 April 2016, when one died, the survivor may be entitled to receive a higher basic State Pension, which is based on the National Insurance (NI) record of your partner. This was only the case if you had not built up your own, full basic State Pension from your own National Insurance record.

In addition, if your partner reached State Pension age before 6 April 2016, it may also be possible to inherit half of your partner’s additional State Pension. However, you could not inherit any of their State Pension if you had already reached State Pension age, but your partner had not at the date of their death.

Your entitlement changes from 6 April 2016

As a guide, earning a salary of £40,000 a year for 40 years would mean paying roughly £145,360 in National Insurance contributions. However, if you reached state pension age on or after 6 April 2016, you and your partner will have built up entitlement to the new State Pension, and in this case your entitlement is based on your own National Insurance record only, not your partners. On the positive side, the full new State Pension pays £185.15 per week in the current tax year, however as you are only entitled to your own State Pension, this means that if you or your partner die before retirement, the qualifying years, and therefore the pension made on the deceased National Insurance record could be completely lost.

The New State Pension

The government made the changes and outlined the new system ‘designed for the 2020s and beyond’ where they felt that both men and women would have the chance to build up a full state pension.

It is therefore important to build up both yours and your partner’s National Insurance record. If you are working, this is usually done automatically and taken directly from your salary. If you are not working, it is important to remember to build up your National Insurance record, as you can do this voluntarily.

How to build up your NI if you are caring for your children

If you have children to care for, it is possible to claim child benefit, which will add qualifying years to your National Insurance record. If you or your partner earn over £50,000, you will need to pay back some of the child benefit, but you would still get the years added to your National Insurance record.

It is also possible to make voluntary contributions to build up enough qualifying years to get a full State Pension. In order to gain one qualifying year, you have to pay £824.20 of Class 3 contributions. This will provide £275.08 each year in State Pension, for the rest of your life, based on the current rates. If you want to check your National Insurance record, and potentially make additional contributions, it is worth speaking to an accountant.

Outside of the state pension what are your other options?

It is also important to build up pensions in addition to the State Pension, as it is clear that legislation can change as it has done in the past. Using the same example of paying in pension contributions over a 40-year career, based on a salary of £40,000 per annum, total contributions of £145,360 could mean retiring with £460,935 built up in a private pension, if you are able to achieve 5% growth each year. Of course, performance cannot be guaranteed, and your fund can go down as well as up.

Having built up this provision in a private pension, and as long as these have adopted the pension freedoms rules brought in by the then Chancellor George Osborne in 2015, if you were to die, the pension could pass to your partner, or indeed any nominated beneficiary, and better still it would be free of inheritance tax at any age. As well as this, if you die prior to age 75, all withdrawals from the pension would also be income tax free.

So, having a plan B for if your partner dies and takes their State Pension with them, could be a very sensible idea for securing your financial future, whatever happens.

How we can help

If you’d like to learn more about how you map out and plan for the retirement you want, why not get in touch and speak to one of our expert advisers. We’re offering anyone with £100,000 or more in savings, pensions and investments a free retirement planning review worth £500.

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Please note: a pension is a type of investment, the value of your investments can go down as well as up. You may not get back what you originally invested.