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State Pensions

Trying to understand the UK State Pensions system can be difficult. For a start there are two schemes, the Basic “old age pension” and the State Second Pension formerly known as SERPS.

Entitlement to benefits from both schemes depends upon your National Insurance contribution record and different rules apply to the employed and the self employed.

Even establishing the age at which your State pension becomes payable is no longer straightforward – to the extent that the Government pensions agency now provides an on-line calculator so that you can work it out.

The Basic State Pension

The basic pension is a flat rate amount set each year through the Budget. The pension quoted in the Budget is the rate for a single person with an adequate NI contribution record. An adequate record is where contributions have been made or been credited for 90% of a working life. The pension is reduced proportionately where the individual does not have such a record. To get the minimum basic pension payable, which is 25% of the full basic pension, the individual needs to have paid, or been credited with, NI contributions for between 10 and 11 years.

A working life is counted from the start of the tax year in which the individual reaches age 16 to the end of the tax year before the one in which the state pension age is reached. It is normally considered to be 49 years for a male and 44 years for a female. As the female state pension age is gradually increased to 65 the working life will also be increased until it matches that of a male.

The State Second Pension

The State Second Pension is currently an earnings related scheme designed to top up the Basic old age pension by providing additional benefits based on working earnings between the ‘lower earnings limit’ and ‘upper earnings limit’. In that regard it is similar to its predecessor the State Earnings Related Pension Scheme (SERPS), but with three different accrual rates instead of just one.

It was previously possible to contract-out of the State Second Pension which  involved forgoing your entitlement from the scheme in exchange for having part of your National Insurance contributions rebated and paid instead to a personal pension.

Contracting out in this way was however abolished with effect from April 2012.

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