The truth about Pensions
The basic state pension is paid to men at 65 and women at 60, who fulfil National Insurance (NI) contribution requirements.
From 6th April 2020, the state pension age for both men and women will be 65.
The government will introduce the retirement age gradually from age 60 to 65 for women over a 10-year period from 2010 to 2020
How much is it worth?
The weekly rates are (year to April 2010):
- Single person: £95.25
- Couple: £152.30
Will I get the full basic state pension?
Not necessarily.
What you get will depend on your National Insurance (NI) contributions – and the rules are tight.
Your pension depends on how long you have worked for and how many ”qualifying years” you have.
A woman with a working life of 44 years will need 39 qualifying years for a full pension and a man with a working life of 49 years will need 44 qualifying years.
However, if you reach state pension age on or after 6 April 2010, you will need just 30 qualifying years for a full basic State Pension.
The contribution record of people who have been unable to work due to sickness, unemployment or caring responsibilities, may be protected by credits or “home responsibilities protection”.
If you reach state pension age on or after 6 April 2010, home responsibilities protection is being replaced with National Insurance credits. Years of home responsibilities protection built up before 6 April 2010 will count as qualifying years of National Insurance credits.
What happens if I have not made enough contributions?
If you have not paid sufficient enough contributions you could be entitled to a partial pension or you may not receive a pension at all.
If you are not eligable to a full Basic Pension you may receive a reduced amount.
But if you retire with less than 25% of the qualifying years for a full pension, you won’t get anything at all.
People aged 80 and over receive a non-contributory pension, at 60% of the basic state pension as long as they fulfil other requirements, such as residency rules.
What about the earnings link?
A link between state pensions and earnings was implemented by Barbara Castle in 1974.
This was to ensure that state pensions kept up with the rate at which salaries were rising.
However, Margaret Thatcher scrapped this six years later, therefore pensioners must now rely on private savings to make up the difference.
To re-instate the link with earnings would cost an estimated £0.5bn in the first year, rising to £10bn by 2010, according to government figures.
Is the state pension age changing for women?
Yes, the pension age for both men and women will be 65 years, the change will be phased in between 2010 and 2020, but will not affect anyone born before 6 April 1950.
If you are a woman and born between 6 April 1950 and 5 April 1955, your state pension age will fall somewhere between 60 and 65.
Longer term pension age rises are planned for both men and women, eventually taking the pension age to 68 by 2044.
Final Salary Schemes, Q&A
What are they?
Final-salary schemes have traditionally been seen as the best type of pension a worker can get.
They promise to pay a retirement income based upon a percentage of your salary every year for the rest of your life.
The amount you get depends on how long you have spent working for your employer and how much you were earning at the time you retired – your final salary.
The amount is typically between a half and a third of your salary.
However, Revenue and Customs rules allow members to build up a pension equivalent to two-thirds of their final salary.
What are defined benefit schemes?
Final-salary schemes are sometimes called “defined-benefit” schemes.
This is because the benefits are set out by the employer before a member joins the scheme.
Are they in trouble?
Final-salary schemes have been big news over the past few years.
This is because a growing number of employers are saying they are too expensive to keep open.
Almost nine million people are still members of UK final-salary schemes.
However the next generation of workers are unlikely to benefit from them, as a lot of firms are closing them to new employees.
Why are they closing?
Due to stock market falls this has meant that the total assets held by many company schemes have shrunk.
If assets fall below liabilities then employers are duty bound to boost ailing final salary schemes in order to ensure that members are paid their benefits in full.
In a falling market, from an employers point of view, final salary schemes can be very expensive to run.
From an employers point of view, the biggest problem is the 10% tax on dividends earned by pension schemes, which was brought in by the chancellor shortly after the labour government was elected in 1997.
Dividends play an important part in the long-term health of pension schemes. Any tax on them increases the possibility that the scheme will not have sufficient assets to meet liabilities.
Because of this, over recent years, a lot of the country’s biggest employers have abandoned final-salary schemes in favour of cheaper “money purchase schemes”.
Pension Credit, Q&A
What is it?
The Pension Credit was introduced on 6 October 2003 and replaced the Minimum Income Guarantee (Mig).
Pension Credit is designed to help out pensioners on low incomes who have some savings.
Millions of households receive Pension Credit, but there are many pensioners in need that are failing to claim.
The credit for 2009/2010 will ensure a minimum income of £130 a week for a single pensioner and £198.45 for couples.
From 6 April 2010 the age from which you can claim Pension Credit will rise in line with the increase in women’s state pension age from 60 to 65 by 2020.
How does it work?
The credit has two elements: The Savings Credit and Guarantee Credit.
The Savings Credit has been introduced to reward pensioners who have a second pension or modest savings.
The Guarantee Credit can be claimed by pensioners who are 60 or over, while the Savings Credit can only be claimed by pensioners who are 65 or over.
The credit is also very important for low-income pensioners as it is a so-called “passport benefit”: for those who claim the guaranteed element of the credit should also get help with housing costs and council tax.
How do I claim?
The credit is administered through the Pension Service, the government office which has been set up to help people claim state support.
The Pension Credit helpline on 0800 99 1234.
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