The new state pension is very complex. It should be a standard £164.35 a week for everyone who has paid at least 35 years of National Insurance contributions, but there is a fly called Serps in the ointment.
Serps (the State Earnings-Related Pension Scheme) was introduced in 1978 by Barbara Castle and gave extra state pension to people based on their pay over the best 20 years of their working life. However, it didn’t cover the millions of people in the public sector and in big private companies who already paid into a good earnings-related pension at work.
They didn’t pay the extra National Insurance contributions for Serps and were said to be “contracted out” of it. In the 1980s and 90s some people also contracted out of Serps into a personal pension and paid lower National Insurance contributions.
When the new state pension began in April 2016, people who had paid these lower National Insurance contributions had a deduction made from their new state pension that took account of the extra private pension they had earned.
So their new state pension is less than the full £164.35 a week, even if they have paid 35 years of contributions. The reduction can be big, but no one with at least 35 years’ contributions can end up with less than £125.95 a week.
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However, that reduction can itself be reduced. Every full year of National Insurance contributions paid from 2016/17 will reduce the deduction by £4.70 a week. These contributions can only be paid for full tax years before state pension age.
For example, if you’re due to reach state pension age next tax year, 2019/20, you can pay three whole years of contributions for 2016/17, 2017/18, and 2018/19. That will boost your pension by £14.10 a week. Those contributions could be paid at work or in some cases credited.
Otherwise you can buy them for £761.80 a year, which is a way to increase your state pension for life.
More information: visit pensionsadvisoryservice.org.uk, call 0800 011 3797, or go to paullewis money.blogspot.com and search for “target 164”.