Check your state pension forecast
Entitlement to the state pension is contingent on having sufficient “qualifying years”. These are tax years for which you have a paid a minimum level of NIC or received NIC credits.
People who reach the state pension age on or after 6 April 2016 need 35 qualifying years in order to receive the full single-tier state pension – set at £164.35 per week for 2018/19. Those with less than 35 qualifying years, but at least ten qualifying years, will receive a reduced state pension, reflecting the number of qualifying years. Anyone who has less than ten qualifying years is not eligible for the new state pension.
Where a person reached state pension age between 6 April 2010 and 5 April 2016, they only needed 30 qualifying years for the basic state pension (set at £125.95 for 2018/19). However, they may also receive the earnings-related second state pension (S2P).
There are various ways to build up qualifying years. The main way is via the payment National Insurance contributions. There are three classes of contributions that build pension entitlement:
- Class 1 for employees;
- Class 2 for the self-employed; and
- Class 3, which are voluntary contributions.
Employees need earnings at least equal to the lower earnings limit (£116 per week for 2018/19, rising to £118 per week for 2019/20), so they can build up a qualifying year. Those with earnings between the lower earnings limit and the primary threshold (£162 per week for 2018/19, £166 per week for 2019/20), can get a qualifying year for free, as they are deemed to have paid notional contributions.
The self-employed must pay Class 2 contributions to build up their state pension entitlement, payable at £2.95 per week for 2018/19 (rising to £3 per week for 2019/20) where earnings exceed the small profits threshold (£6,205 for 2018/19, £6,365 for 2019/10).
Class 4 contributions do not generate any pension or benefit entitlement. As plans to reform NIC classes 2 and 4 have been put on hold, this will continue to be the case for now. Class 2 contributions can be paid voluntarily by self-employed earners with earnings below the small profits threshold. This is cheaper than paying Class 3.
A full year’s contributions must be paid for a year to be a qualifying year. If contributions are only paid for part a year, the year does not count. However, all is not lost – Class 3 contributions can be paid voluntarily for the missing weeks to turn a non-qualifying year into a qualifying year or to increase the number of qualifying years. They cost £14.65 per week for 2018/19, rising to £15 per week for 2019/20.
National Insurance credits
A person may be awarded National Insurance credits, which will allow them to build up their state pension entitlement if they are not working. There are various credits payable depending on the circumstances.
From old to new
The change in the state pension regime for those reaching the state pension age on or after 6 April 2016 means that it is necessary to translate entitlement under the old system to entitlement under the current system.
A person’s contributions record (National Insurance contributions and credits) made before 6 April 2016 is used to work out a ‘starting amount’. This forms part of the person’s new state pension.
The starting amount is the higher of:
- the amount that the person would have received under the old state pension rules (including both the basic state pension and the additional state pension); and
- the amount that they would have received had the new state pension been in place at the start of their working life.
Where a person has been contracted out of the state pension at some point, the starting amount includes a deduction to reflect this.
If the starting amount is more than the single-tier state pension, the person will receive the full single-tier state pension plus an extra payment (the ‘protected payment’) equal to the amount by which the starting amount exceeds the full single-tier state pension. Any additional qualifying years added from 2016/17 onwards will not add anything to the state pension.
If the starting amount is less than the full single-tier state pension, a person needs to add more qualifying years after 6 April 2016 before they reach state pension age to qualify for the full single-tier state pension. This can be done simply through the payment of Class 1 or Class 2 contributions where the person is still working, via National Insurance credits where eligible, or via the payment of voluntary contributions (normally Class 3 unless the person is able to pay Class 2 voluntarily).
If a person has not paid contributions or received credits prior to 6 April 2016, their state pension entitlement will be calculated entirely by reference to the new rules.
The position may become complicated if a person contracted out before 6 April 2016. Full rate contributions were not paid in a contracted out year and this is reflected as a deduction when working out the starting amount. Thus a person who has worked for 20 years, but contracted out for some, may not have a starting value equivalent to 20 qualifying years.
Check out your situation
Checking your state pension forecast can be done easily online on the gov.uk website. The tool will tell you what you will get now on current rates and also what you will get at your state pension date (again at current rates) on the assumption that x more years are paid by that date. A state pension forecast can also be requested by post by completing form BR19.
HMRC do make mistakes and if the forecast is not what you were expecting, query it.
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Sarah Bradford BA (Hons) FCA CTA (Fellow) is the director of Writetax Ltd (www.writetax.co.uk) and its sister company, Writetax Consultancy Services Ltd. She writes widely on tax and National Insurance contributions and is the author of National Insurance Contributions 2020/21 published by...