Understanding the UK State Pension System
Before delving into the specific reasons for reduced payments, it is vital to understand the two different State Pension systems that operate concurrently in the UK. The rules depend on when you reached State Pension age (SPA).
The Old State Pension System
If you reached SPA before April 6, 2016, your pension is calculated under the old rules. This system had two tiers: the basic State Pension and the Additional State Pension (also known as the State Earnings-Related Pension Scheme or SERPS). Under this system, you needed 30 qualifying years of National Insurance (NI) contributions or credits for the full basic pension.
The New State Pension System
For those reaching SPA on or after April 6, 2016, the new, single-tier system applies. This is based on your individual NI record. To get the full new State Pension, you generally need 35 qualifying years. A minimum of 10 qualifying years is required to receive any payment at all. The shift between these two systems is one of the main causes for payment differences, as historic records are used to calculate a 'starting amount'.
The Most Common Factor: Incomplete National Insurance Records
By far, the most frequent reason why do some pensioners get less State Pension is an incomplete or inaccurate National Insurance record. Your NI record is a running tally of your contributions throughout your working life.
What can cause gaps in your NI record?
- Low Earnings: If your earnings in a given tax year were below the minimum threshold, you may not have paid enough NI to qualify for that year. This is a common issue for part-time workers or those with variable income.
- Unemployment: Periods of unemployment where you were not claiming benefits (which often come with NI credits) can leave gaps.
- Self-Employment: As a self-employed person, you are responsible for paying your own NI contributions. A failure to do so, or not paying enough, will create gaps.
- Living Abroad: If you worked or lived overseas, your NI contributions might not have been paid into the UK system, resulting in missing years.
- Taking Career Breaks: Taking time off work for reasons such as childcare or caring for a relative, without claiming the relevant NI credits, can reduce your qualifying years.
The Impact of 'Contracting Out'
For many years, contracting out was a major cause of a lower-than-full State Pension. It's a complex area, but essentially, it was an arrangement that applied under the old State Pension system and was abolished in 2016.
How contracting out worked
From 1978 to 2016, employees could 'contract out' of the Additional State Pension. Instead of paying a portion of their NI contributions to the state's additional pension, a rebate was paid into a private pension scheme. In exchange, the private pension scheme was required to provide a minimum level of pension known as the 'Contracted-Out Pension Equivalent' (COPE).
How COPE affects your New State Pension
When calculating a person's New State Pension, the government effectively deducts an amount equivalent to the Additional State Pension they would have received if they had not been contracted out. It's not a deduction of money you've already received, but an adjustment to account for the private pension top-up you received instead. While this doesn't reduce the State Pension itself, it can mean you don't receive the full flat rate of the new State Pension if you have contracted-out years.
Historical Underpayments for Married Women
For decades, married women were entitled to claim a pension based on their husband's NI contributions, but often received a reduced payment. Under historical rules, many married women were underpaid because their pension was not automatically increased. This issue was not widely known, and many women missed out on significant payments they were entitled to.
The current underpayment scandal
It has come to light that hundreds of thousands of married women, widows, and people over 80 were underpaid their state pension. This includes women who were on a reduced 'married woman's rate' and whose husbands reached State Pension age before 17 March 2008. The system failed to automatically uplift their payments, meaning they were left thousands of pounds out of pocket. In many cases, these individuals must now actively claim their missing pension. The issue has prompted a government review and a correction exercise is currently underway.
A Comparison of Old vs. New State Pension
| Feature | Basic State Pension (Old Rules) | New State Pension (New Rules) |
|---|---|---|
| SPA Date | Before 6 April 2016 | On or after 6 April 2016 |
| Qualifying Years | 30 for full amount | 35 for full amount (for no prior record) |
| Minimum Years | 1 year for some entitlement | 10 years for any entitlement |
| Additional Pension | Had a second tier (SERPS/S2P) | No additional state pension |
| Contracting Out | Was possible; impacts pension amount | Ended in April 2016; impacts calculation |
| Married Woman's Rate | Historically affected many women | Based on individual NI record |
| Max. Amount | Based on basic + additional | Single, flat rate (adjusted for contracting out) |
How to Check and Increase Your State Pension
If you are concerned about your State Pension entitlement, there are several practical steps you can take:
- Check your State Pension forecast: The easiest and most reliable way to understand your future entitlement is to get a State Pension forecast from the government. This will show your estimated pension based on your current NI record. You can do this online through the official government website. It is the single most important step you can take. Check your State Pension forecast on GOV.UK.
- Review your National Insurance record: Your forecast will indicate if you have any gaps in your NI record. You can also view your full record online to see which specific years are missing. Understanding the reasons for these gaps is the first step towards fixing them.
- Pay voluntary contributions: If you have gaps in your record, you may be able to pay voluntary NI contributions to fill them. This can be a very cost-effective way to boost your pension, with a small upfront payment potentially leading to thousands more in retirement income. You can typically only do this for the past six tax years, so it's important to act promptly.
- Claim NI credits: If you took time off for certain reasons, such as caring for a family member, you may be eligible for free NI credits. You can apply to have these credits added to your record to fill gaps.
- Look into deferring your State Pension: You have the option to defer claiming your State Pension when you reach SPA. For every year you defer, your weekly payments will increase by a certain percentage. This could result in a higher income later in life, and is useful if you continue to work past SPA.
Conclusion
For many pensioners, a lower State Pension is a direct result of their unique working history and the complexities of the pension system. Factors like incomplete NI records, historic contracting out, or being impacted by past underpayment issues can all play a role. By understanding these issues and actively checking your entitlement through a State Pension forecast, you can take control of your financial future and take steps to increase your payments where possible. This is a crucial part of healthy aging and financial planning for retirement.
What about inheritance?
Under the New State Pension rules, you cannot inherit your partner's State Pension. However, if your partner reached State Pension age before April 6, 2016, you may be able to inherit part of their Additional State Pension. It is important to check the specific rules with the Pension Service to see if this applies to you.
Can my spouse get a better pension?
As noted in the comparison table, under the New State Pension, your spouse cannot claim on your NI record. But if they reached State Pension age before April 6, 2016, and had a poor NI record, they may be eligible for a higher pension based on your contributions under the old rules. This is particularly relevant for those potentially affected by the underpayment scandal.
How are overseas residents affected?
If you have lived or worked abroad, you may have gaps in your NI record or may be subject to different rules. It is important to check with the International Pension Centre at the Department for Work and Pensions to understand your specific situation and entitlement.
