Managing my money
Managing my money

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Managing my money

7.1.1 State pensions

Limited state retirement pensions were first paid in the UK in 1908. These were improved in the 1946 National Insurance Act which brought in flat-rate universal state pensions (with effect from 1948).

While various developments in state pensions have taken place since then, the main thrust of policy between 1980 and 2016 has been to limit public expenditure on state pensions.

The UK government plans staged rises in the age at which people can receive their state pension, to reach 68 years in the mid-2030s, with further increases likely. Many predict that the state pension age will eventually rise to 70 years. One aim of these moves is that, on average, no more than a third of adult life should be spent in retirement. So the longer the population lives on average the higher will be the state pension age.

‘There are actually two state pension schemes in place in the UK. The ‘old’ scheme for those who reached state pension age before April 2016 and the so-called flat-rate pension scheme for those reaching state pension age from April 2016 onwards.

The 'old' scheme has two parts. The first part, the state basic pension, is paid at a flat rate (£119.30 a week in 2016/17 for a single person), equivalent to about 20% of national average full-time earnings compared with 28% in 1980. The decline has been due to the fact that, since 1980, state pensions have generally been increased in line with prices, which historically have tended to rise more slowly than earnings.

However, from 2011 onwards, the state basic pension has increased each year with the higher of either earnings inflation, price inflation or 2.5%. This means that, in future, the basic pension should retain its value relative to earnings (or even rise a little faster). Another key change, introduced in April 2010, was a reduction in the conditions to qualify for a full basic pension.

Entitlement to the basic state pension depends on paying, or being credited with, National Insurance contributions (paid by employees and the self-employed) during working life. Credits are given for certain periods out of work, such as being ill, unemployed or caring for children.

People reaching state pension age before 6 April 2010 needed to have National Insurance covering roughly nine-tenths of their working life to get the full state basic pension. For people reaching state pension age on or after 6 April 2010, the required contribution record was reduced to 30 years and, although it will rise from April 2016, will still be just 35 years.

A shorter record means a reduced pension – although from 2016, a minimum number of years (expected to be 10) will be required to get any pension. However, people can now have substantial periods of not working without damaging their basic pension entitlement.

Wives – and, since April 2010, husbands and registered civil partners – can claim a basic pension of up to £71.50 (in 2016/17) based on their spouse’s or partner’s record if their own basic pension would come to less than this. From 2016 this will stop for those new to reaching state pension age.

The second part of the state pension – the state additional pension (or additional second pension) – is restricted mainly to employees. It was first introduced in 1978, when it was called the State Earnings Related Pension Scheme (SERPS).

In theory, additional state pension can provide a substantial boost to the state pension (up to £164.36 per week in 2015/2016 - with the figure for 2016/2017 unavailable at the time of writing) but, in practice, the average amount paid is much lower. Many people have been ‘contracted out’ of the state additional pension, which means that this part of their state pension has been replaced by a workplace or personal pension scheme in return for reduced or refunded National Insurance contributions.

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