A look at how the biggest single benefit in the entire benefits system work. What makes up my State Retirement Pension. The old style scheme will still apply to most pensioners after April 2016 and can be relevant to the newly retiring too.
This blog follows on from the last blog - see the link below, - when we took a look at the gentler breezes of welfare reform in “pension age” and just when exactly “pension age” is these days and where it’s heading to. This time we focus on the biggest benefit of all the State Retiremnt Pension (SRP) and in particualr at the form that will be relevant to most current pensioners ,- the old pre-April 2016 scheme.
1. What is the State Retirement Pension? Who can claim it?
Probably this is the one benefit that requires the least explanation of any of them. Everyone knows what it is and almost 100% of people entitled to it claim SRP.
However there is a big difference as to which State retirement Pension you claim:
- you can only access the “old retirement Pension Scheme - the main subject of this blog - if you reached pension age before ^th April 2016.
- if you reached - or will be reaching pension damage after that date - your claim will be under the New Retirement Pension scheme described in the next blog. However your entitlements for years of contributions made before April 2016 will be also be looked at under the old scheme rules, so this blog may still be of interest.
The State Retirement Pension - both in its old and new forms - is a weekly pension payable to everyone who has reached pension age, based on their lifetime National Insurance contribution history. Be you duke or dustman, if you have paid your compulsory National Insurance contributions you are entitled to SRP, regardless of any other savings, pension schemes, other income, acres in Borsetshire or offshore investments.
It is the biggest single item in the Department of Work and Pensions budget and a growing share of that budget. In 2016/7, the State Retirement Pension accounted for £92 billion out of a total social security budget of £217 billion.
The popular tabloid typical benefit claimant is a jobseeker or a person on the sick, both perhaps to be to be treated with a presumption of suspicion rather than sympathy, that they might be shirking or exaggerating their illnesses. The truth is that even by DWP figures 99.3% are not . On the whole the problem with benefits is not fraud but significant under claiming.
But if you took an extreme view and abolished help for unemployment and sickness altogether, you would save maybe £9 billion. So the typical benefits claimant is not some amusing character from the mythical Chatsworth estate in Shameless, but a respectable - and possibly even disgusted - pensioner from Tunbridge Wells
In the Benefits Advisor’s world though, Retirement Pension issues rarely figure. People are expecting to claim it and the process is relatively straightforward, as are the criteria. Everyone gets sent a pensions forecast and details on how to claim in the run up to eligibility and are treated with respect by the DWP.
People feel no stigma in claiming something based on their past contributions. As a result there is almost no under-claiming and everyone entitled to it gets it. Being non-means tested, it acts as a platform to encourage you to build up your own savings and other pension provision - an exemplar of the “Beveridge" approach to non-means tested social security.
2. The history of the Retirement Pension
The "Lloyd George"
It was in 1909, when Lloyd George introduced the very first pension. It was a bold move in its day, but looking back it was rather a modest one.
The princely sum of 5/- a week (25p) - or £24 a week adjusted for inflation - was
- available to men and women over 70
- who were on a low income and passed a means test
- and also passed a tests of good character: you must not have "avoided work", nor been imprisoned nor detained under the Inebriates Act within the last 10 years.
There were some 500,000 claimants
The birth of non-means tested pensions
A contributory pension started for some employees and employers in 1925, paid at 65 for men and women. In 1940, the age for women was reduced to 60 to reduce hardship among married couples when a man turned 65 and his often younger wife had not yet reached that age. These were the days of the male breadwinner and the female housewife and carer.
The modern State Retirement Pension,
This dates from 1948, along with the complete Beveridge Report overhaul of "cradle to the grave social security" that also gave birth to the modern "welfare state" . The principle was to establish a compulsory system of National Insurance paid by all to fund non-means tested flat rate benefits in the event of risks - such as sickness and unemployment - and eventualities such as retirement and old age.
Benefits were to provide a national minimum standard paid at a flat rate and with reference to some research as to what is needed to live on . But “in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family”
After an initial transitional period, the current pension emerged: you pay in NI contributions over your working life and draw a pension in retirement as a matter of right and entitlement from your contributions, while remaining free to pay into employer or private schemes or save or invest save , so as to top up the basic provision of an old age pension.
The additional state pension
In 1976, the basic flat rate scheme was added to by an additional state pension for those not paying in to private or works pensions. Those who did so, could contract out of the additional pension scheme. If not, you paid a higher rate of National Insurance to build up entitlement first under the
State Earnings Related Pension (SERPS) - from April 1978 -which was later simplified into the Second State Pension. (S2P) from 2002. The idea was to eventually abolish pensioner poverty by giving everyone the equivalent of a works pension scheme.
The "new style" State Retirement Pension - from April 2016
From April 2016 a new retirement pension scheme applied to people reaching pension age after April 2016, but more on that next time . Existing pensioners continue under the old scheme and cannot transfer to the new one and won’t be affected by it. New pensioners will be assessed under both schemes for all pre- April 2016 payments , so for some years the old scheme will remain important to them.
How many people over 65 are there?
In 2016 there were some 12 million people over 65 in the UK or 18% of the population. Back in In 1976 it was 14 % and by 2046 it is expected to be 25%. The growth is due to better health care, longer life expectancy and smaller family sizes. The population is "aging" and sometimes is dramatically described as a "demographic time bomb" waiting to explode It is something that politicians both celebrate and rather worry about, given the way the State Retirement Pension is currently funded.
3. The four categories of "old style" State Retirement Pension
There are four categories of Retirement P under the "old" scheme:
- Category A based on your own lifetime contributions
- Category B based on the contributions of your spouse/civil partner
- Category D a non-contributory pension for the over 80s that can kick in if you didn’t have enough contributions for a Category A or B pension or only received a partial one (worth less than Category D)
The eagle eyed amongst you will be wondering what happened to Category C?
Well that is a non-contributory pension for those who had reached pension age in 1948. So the youngest claimant would now be 130 if a woman and 135 if a man. However, there are less than a dozen somewhat younger dependants of such claimants still receiving a Category C pension.
4. What goes to make up my pension? How much will it/should it be?
It varies a little with each of the Categories of Pension, with the most complicated being the full monty all inclusive Category A
If you get - or expect to receive a Category A pension then it will be made up of:
- your basic retirement pension - the maximum rate is £125.95, but this may be reduced if your national insurance record is incomplete
- any adult/child additions : £68.35 for a spouse or civil partner - if claimed before April 2010 - or £11.95 for e.g. a grandchild - if claimed before April 2003.
- an age addition of 25p if you are over 80 - don’t spend it all at once. This harks back to the days of the “Lloyd George “ which offered a double pension for the over 80s. It illustrates the perils of benefits freezes, as by now it should be worth £24
- an invalidity addition equal to any age-related additions in long-term Incapacity Benefit/Invalidity Benefit if you were getting these close to when you retired
- an increase for deferment - a higher amount if you put off claiming your pension after pension ag
- graduated retirement benefit based on earnings from 1961 to 1975
- any additional state pension if you reached pension age after April 1978
With Category B - where you claim from someone else’s contributions - it varies according to the basis upon which you are doing that.
So if you are claiming as the spouse or civil partner, of the claimant - perhaps because you don’t have much entitlement to Category A in your own right - then you would just be looking at:
- a Category B pension up to a maximum of £75.50,
- any higher amount from the claim having been deferred
- plus that long awaited 25p age addition when you turn 80
Category B as a widow/widower - If you claim as a widow or widower of the original claimant, then it looks much more like the fuller list under Category A, except for the invalidity allowances. However, any additional state pension that you inherit from your spouse will be at a reduced rate.
Category B after divorce or end of a civil partnership - Normally you would claim in a Category A pension in your own right. However, you can count your former spouse/civil partner’s contributions instead of your own when your Category A pension is worked out for the years when you were together. This might then produce a higher pension than if it was based on just your own contributions.
This is paid at a flat rate as it does not depend on - or vary with National Insurance contributions during your working life.
- a Category D pension of £75.50
- an amount for an adult dependant if claimed before 2010
The full basic rate of pension
This is £125.95 a week in 2018/19. But entitlement that amount will depend on having 30 years of full National Insurance over your working life.
In the past you needed 90% of your working life - i.e 44 years for a man and 40 years for a woman.
If you have only partial NI contributions history your pension is adjusted accordingly.
So the pension you actually receive could be:
- lower than a full basic pension - if you only have an incomplete NI record or
- higher than the full basic pension as a result of additions ranging from 25p for being over 80 to in some cases an amount equal to or more than your basic pension from SERPS or S2P additional state pensions.
5 Graduated Retirement Benefit
This was an extra earnings related addition to your pension based on National Insurance contributions between 1961 and 1975. Back then you paid at a flat rate with an additional graduated contribution, which in turn earned you a small increase in Retirement Pension
6. Extra pension for deferring your retirement
You can put off claiming your retirement pension or stop claiming it once you have. In exchange you will build up either a lump sum or a higher pension when you do retire. This will apply to your basic retirement pension and any The rules were made more generous from April 2005 to encourage people to do that. There is no longer a 5 year time limit on deferral.
Under the post April 2005 rules you get 0.2% extra pension for each week that you defer or 10.4% for every year. If you defer pension for more than a year you can elect to receive the extra as a lump sum instead, based on the amount of retirement pension unclaimed plus interest.
You can get fuller guidance on deferment from the DWP guide here
7 Additional State Pension
The basic pension is essentially a flat rate scheme, with some small increase from an additional Graduated Retirement Benefit.
The big idea enacted in 1976 was to give everyone access to the equivalent of a work or private pension. Employees after 1979, who were not “contracted out” into a occupational or private scheme paid additional NI contributions - as did their employers- to accrue entitlements under the additional state pension. The scheme was reformed in 2002, so your contributions paid into:
- the State Earnings Related Pension (SERPS) - from April 1978 up until 2002
- the Second State Pension (S2P) - from April 2002 to April 2016.
So any additional pension is calculated by adding together any SERPS and any S2P entitlement built up since 1979. Essentially, S2P was a simplified and more generous scheme - especially at the lower end as it assumed a minimum level of earnings even if you earned less
That also benefited carers whose National Insurance Credits also started to buy them a Second State Pension . You might not have got much weekly benefit from Carer’s Allowance, but you were building up a pension as if you were earning some £14,000 a year.
How your Additional State Pension is worked out is quite complicated but if you had been in the scheme since 1978 then the maximum amount could be around £160 a week.
8 Keeping up the value of pensions.
Increases used to be a bit ad hoc, as and when the Government felt obliged to act. Thew last big random catch up increase was in 1976 to £10 single and £16 couple
Linking the pension to earnings and prices
Thedecision was made to link all benefits to annual increases based on the higher of either average price increases or average earnings. By 1979, that big increase and the earnings link meant that pensions were worth 26% of average earnings. You can see a pretty graph from the Financial Times here.
Breaking the earnings link
But then the new Thatcher administration removed the link with earnings, leaving the protection just in line with prices. Each year the difference between an increase in prices and one linked to earnings was small, but accumulated over time. The real value in what the pension could buy was still protected, but as earnings increased over the long term, the pension was left further and further behind. By 1997, the pension was only 16.5% of earnings.
However, this did act to defuse what was being called "the demographic time bomb", caused by an ageing population and smaller family sizes. The potential problem is that a growing number of pensioners living longer rely on a smaller number of workers to pay the National Insurance contributions from which their pensions come; just as those pensioners had paid for the pensions of those that went before from their NI contributions.
Focussing additional resources differently
Labour in 1997, decided to put more resources into pensions but in a different way:
- some extras for all: Winter Fuel Payments, Free Bus passes and Free TV licenses over 75 -
- occasional increases above the inflation index after the flak after this led to only a 75p increase one year.and
- but mainly focussing additional resources on some dramatic increases for the lowest income pensioners via a new Pension Credit.
This did still leave the Retirement Pension gently declining, relative to average earnings .
The triple lock guarantee
In 2010 the Coalition Government, took that radical step of not only restoring a link to earnings but adding a third option of a 2.5% increase creating a "triple lock guarantee" In recent years tof low inflation, the 2.5% has led to real increases in the state pension. and some recovery to 18% of average earnings and rising. There is now a realisation that the 2.5% - deliberately intended for some catch up, may not be sustainable long term, but no-one is yet ready to dare to break the news ...
It all makes a difference over time
Had the link with average earnings not been broken, then the Retirement Pension last year would have been £165 a week in 2015 rather than £125. And if the link had only been with prices since 1948, Age UK estimate it would be worth around £50 a week. It’s all in the percentages ...
Great news then for pensioners, but less good news for those on “working age” benefits. Essentially real cuts here are being used to pay for real increases in "pension age" . Overall, the social security budget hasn’t changed at all, but within it there have been big shifts.
Other ways to tackle the rising cost of pensions
While the earnings link is a great thing in itself - and would be even better if applied across all benefits - it does put more pressure on those "demographic time bomb" worries . There are lots of other options but the ones adopted so far include
- accelerating moves to a higher pension age
- and the new "single tier " pension for those retiring from this April. This closes down the worry of the undunded additional state pension.
9. Will my cancer diagnosis make any difference to my Retirement Pension?
State Retirement Pension
Not directly. You receive your Retirement Pension because of your age, based on your past contributions and regardless of either your state of health. Or even - unlike the first Retirement Pensions - your moral character …you can grow old as disreputably as you wish
Occupational and private pensions
Things may be very different in relation to any occupational or private pension, especially if you receive a cancer diagnosis in the run up to retirement.
a final salary scheme might permit earlier “ill health” retirement, with either some reduction, no reduction or an increase to a higher amount.
A defined contribution scheme builds up a pension pot rather than a specific entitlement based on salary. There may be insurance based top ups to that pot or a cancer diagnosis may affect what you might expect to get in return for your pot, depending on your Pension Choices . This may be something to consider in both the run up to retirement or you have not yet committed your pension pot.
Otherwise while Retirement Pension isn’t affected by a cancer diagnosis, you may - following the Steps approach suggested last time - be able to get additional help for the extra costs of living with cancer via a claim for Attendance Allowance, regardless of your financial circumstances.
And if money is a bit tight, you may well find that an award of AA can significantly increase your Pension Credit or allow a claim when previously you could not. So there is extra help available for those extra cancer related difficulties regardless of your income, but just not within the Retirement Pension itself.
10 Providing for a partner.
One worry for people who do receive challenging news about their health is about providing for their partners should things not go well. Even if your cancer is eminently treatable with an optimistic prognosis, the news of a diagnosis can set you thinking.
- Bereavement Benefits - now replaced by Bereavement Support Payment only apply to those widowed before pension age.
- However as detailed earlier, if your partner hasn’t built up much pension entitlement of their own then they could receive a Category B pension based on your perhaps higher contributions record
- Entitlement to additional state pension can also be inherited as can entitlement to occupational and works pensions. but at a reduced rate
- However inheritance of state retirement Pensions - and usually other pensions too - depends on their being a legal connection by marriage or civi partnership
If you have preferred to be together in a long term and committed partnership, but without the available forms of legal relationship, then the options might be:
- to re consider whether the available ways of an “all in” legal ties could be a compromise you could live with; this may be helped as and when the simpler legal contract of civi partnership becomes available as an option to all couples. And a chance for one hell of a party if you are so minded.
- to check with a solicitor about alternative ways of putting such protections in place, piece by piece. It can be done, if not entirely, but it does involve more forms. Any party may be even more well earned
If you have any general queries or comments about this blog, please post them in the Forums. It would be great to hear the thoughts, experiences and wisdom of other visitors to Maggies Online
For individual advice about your particular situation then you would be very welcome at your nearest Maggie’s Centre . You can find your nearest Maggies Centre here. Alternatively you may want to see if there is a Macmillan Benefits Advice or Citizens Advice Service in your area.
Next time I will look at the New “single tier” Retirement Pension and then move on to the changing face of Pension Credit.
Useful Links and further reading
Finding individual face to face help from a Benefits Advisor:
- Visit your local Maggie's Centre and talk with one of our benefits advisors. Find your local centre here
- See if there is a Macmillan advice service near you here
- Find your local Citizens Advice office: in England & Wales - here. In Scotland - here
Other blogs in this series
- Part 1: Introduction - when is pension age? welfare reform in pension age, steps to maximum entitlement - available here
- Part 3: State retirement Pension: the new post April 2016 scheme and how your entitlement is still largely governed by the old rules - available here
- Part 4: Extra help after a cancer diagnosis - disability benefits and Pension Credit - available here
- Part 5: PC sums in more detail - available here
- For a more detailed look at Retirement Pensions old and new you might like to look at Age UK's factsheet available here
- You can see a pretty diagram of the total benefits budget here and an even prettier one from 3 years ago here :-)
- You can get fuller guidance on deferment from the DWP guide here
- You can see a pretty graph from the Financial Times here.
- For information about Attendance Allowance, you might like to look at the blog here.