When the new state pension was introduced for those reaching pension age from 6th April 2016 it was intended to be much simpler than the system it replaced.
You can navigate through the guide using the table of contents below, or if you'd like to read the guide end-to-end in full, you can download a PDF copy.
- The simple case - people who make their first contributions after April 6th 2016
- The transition to the new state pension - anyone with contributions before 6th April 2016
- Special cases
- Your questions answered
- Where to find out more
- Appendix 1 - Jargon Buster - some technical terms explained
- Appendix 2 - How is the contracted out pension equivalent worked out?
Instead of a state pension with lots of different parts (basic pension, state earnings-related pension, graduated retirement benefit etc) there would be just one state pension, paid at a flat rate to those with 35 years in the National Insurance system. Unlike the system it replaced, the new pension would be based wholly on the contributions of the individual concerned, with no extra amounts based on the contributions made by a spouse1 and no inheriting of rights after the death of a spouse.
For those who leave school today, the new state pension will indeed be pretty much as simple as this. If they pay in to the system (or are credited with contributions) for 35 years, they will get a pension at the full flat rate, currently £175.20 per week.
However, pension reform never starts from a blank sheet of paper. At the point of change in April 2016 people had widely varying histories of NI Contributions. Some had been contributing for a long time or had high earnings and were already expecting a pension above the flat rate. Others had only been part members of the state pension system because they were building up a company pension. How would they be treated? And what about those who were expecting a payment based on the record of their spouse?
To try to strike a balance between a swift move to the new simpler system whilst recognising those with expectations under the old system, a transitional period was established post April 2016 during which a more complex calculation is undertaken to establish entitlement. This calculation takes some account of rights under the old system but tries to get as many people as possible as soon as possible on to the new rules and full flat rate.
In this guide we seek to explain how much you will get from the new state pension. We try to answer questions such as:
- If I’ve been promised a pension above the new flat rate, will I still get it?
- My statement shows a Contracted Out Pension Equivalent (COPE) figure – do I need to take this off my pension forecast?
- I’ve paid in more than 35 years, why don’t I get a full pension?
- Will I get any pension based on my spouse’s contributions?
- If I die, will anyone inherit any of my pension?
- Why are different bits of my pension uprated at different rates?
- What happens if I delay taking my state pension?
- Can I top up my state pension?
We begin by explaining how the system will work for those who spend their entire working life under the new rules – essentially those starting work since April 2016. We then deal with the vast majority of people who have some contributions in the period pre April 2016.
We explain how their pension as at April 2016 is worked out and how years post April 2016 build on this ‘starting amount’. In particular we explain how the whole business of ‘contracting out’ affects state pension rights under the new rules. We then move on to explain the special rules for particular groups of people, before answering some of the most commonly asked questions about the new state pension. In the appendix we include a ‘jargon buster’ which explains some of the technical terms used. We also provide a second appendix which deals with a particularly technical issue which may be of interest to some.
Before going into details of the new rules, it is important to stress that most of the complexity around the transition to a new system applies to those within around 15 years of state pension age. For younger workers, broadly those in their early fifties and below, the vast majority will simply receive the full state pension.
Figure 1 shows an estimate of what proportion of people reaching pension age in each year will draw the full flat rate pension.
As the chart shows, in the first few years of the new state pension, slightly under half of those retiring will get the full flat rate (or above). For these people, and others who retire in the early years of the new system, much of the complexity of this guide will be relevant. However, the proportions who get the full flat rate rise relatively quickly. By the late 2020s, roughly four in five of those retiring will get the full flat rate. This means that most of those who are currently in their mid fifties or younger can reasonably assume that they are heading for the full flat rate unless they have spent significant parts of their working life not contributing or outside the UK.
The simple case - people who make their first contributions after April 6th 2016
Case Study A: Full new state pension, all contribution years post April 2016
Amy starts work after 6th April 2016 and builds up 38 qualifying years of NI Contributions and credits by the time she reaches state pension age.
Amy’s state pension will be £175.20 per week (at today’s prices) because she has at least 35 qualifying years after 6th April 2016.
Case Study B: Partial new state pension, all contribution years post April 2016
Bharat starts work after 6th April 2016 and builds up 33 qualifying years of NI Contributions and credits by the time he reaches state pension age.
Bharat’s state pension will be £165.19 per week (at today’s prices), which is 33/35 of the full flat rate figure. As we discuss later, he may wish to consider paying voluntary NI Contributions to top his pension up to the full flat rate.
The transition to the new state pension - anyone with contributions before 6th April 2016
- People who had already built up a state pension *above* the new flat rate who would have objected if their pension was cut to the flat rate amount;
- People who had paid different rates of NI Contributions over the course of their working life; for various reasons (discussed later), different workers had contributed into the system at different rates and a decision had to be made as to how far those differences should be reflected or ignored when the new system was introduced;
- People who were expecting to get a pension based on the contributions of a spouse, or perhaps to inherit a pension from a late spouse; as the new state pension is based primarily around individual contribution records, a decision had to be made as to how far previous expectations should carry forward into the new system.
- A ‘basic state pension’, paid in full to those with 30 years or more of National Insurance Contributions; the current rate is £134.25;
- Any earnings-related state pension built up from the State Second Pension, the State Earnings Related Pension Scheme (SERPS) or the Graduated Retirement Benefit.
- Work out how many ‘qualifying years’ you have over your working life; if the figure is 35 or more qualifying years then start this calculation with the full ‘flat rate’ amount, currently £175.20 per week; if you have 34 or fewer, scale down the figure proportionately; so, for example, for someone with 33 qualifying years, the basic amount to use here is 33/35 of the full flat rate;
- Deduct an amount for any periods of ‘contracting out’; this amount is known as the ‘Contracted Out Pension Equivalent’ (COPE); Box 1 and Box 2 explain more about what ‘contracting out’ means, and what the COPE is.
Box 1. What is contracting out, and why does it affect my state pension?
For many years, many companies have offered their workers an occupational pension to top up their state pension. In 1978, the Government introduced its own top-up pension widely known as SERPS – the state earnings-related pension scheme. This created a potential for double provision, with workers paying National Insurance to build up an earnings-related pension from the state, and also paying into an earnings-related pension from their employer. In order to remove this potential duplication, pension schemes were allowed to ‘contract out’ of SERPS. Although the rules around contracting out are complex, the basic idea was that as long as the occupational scheme could guarantee to provide a pension at least as good as the SERPS pension then they could opt their members out. In return for the undertaking to provide a pension at least as good as SERPS, employers and employees in ‘contracted out’ schemes were allowed to pay a reduced rate of NI contributions.
Employers and employees benefited from something called an NI ‘rebate’ which lowered the rate of contributions that they made.
In 1988, the principle of ‘contracting out’ of SERPS was extended to personal pensions, though it was implemented in a slightly different way. Where an individual was paying into a personal pension scheme that was ‘contracted out’, they also benefited from an NI rebate. But rather than paying a lower rate of contributions, they continued to pay full NI contributions. Instead, the NI rebate was paid directly into their personal pension fund.
Even before the introduction of the new state pension, if you had contracted out this would be taken account of when your state pension was worked out. For example, for the period from 1978 to 1997, the government would work out how much SERPS you would have built up if you had *not* contracted out, and would then deduct the amount of pension which your occupational pension scheme had promised to deliver in lieu of your SERPS pension. If you were contracted out for the whole period, this could reduce your SERPS pension to zero.
Contracting out into salary-related pensions was abolished in April 2016, whilst contracting out into ‘pot of money’ or Defined Contribution pensions was abolished in April 2012.
When the new state pension was introduced, the government needed to decide how to treat past periods of contracting out. There were two extreme options:
a) Forget that contracting out ever happened – this would have been by far the simplest option; but it would have been unfair to those who did not contract out; they would have paid in far more in NICs than those who contracted out, but would still have got the same state pension;
b) Keep making deductions for contracting out indefinitely – at the other extreme, there was a case for saying that if someone had ever benefited from lower NICs because of contracting out, then there should always be a deduction from their state pension to reflect this; this might have been fairer, but with contracting out only abolished in 2016, there would have been people retiring in the 2060s who would still have had deductions from their state pension to take account of contracting out nearly fifty years earlier; this would have made the transition to the new ‘flat rate’ system extremely slow;
In the end, the DWP opted for a compromise between these two extremes. As at April 2016, full account is taken of past contracting out, as would have been the case if the system had not been reformed. However, once that calculation has been done, any further years of contributions from 2016/17 onwards add to the 2016 starting amount. Those with several years of contributions from 2016/17 onwards therefore have the potential to build up towards a full flat rate state pension even if they had past periods of contracting out. The upside of this approach is that the majority of pensioners will get the full flat rate pension within about five years of the reform coming into force. The unfairness, arguably, of the new system is that those who were contracted out have the potential to draw a full state pension, plus their company pension, even though they put less into the system than their neighbour who paid full rate NI Contributions through their working life.
Box 2. What is the ‘Contracted Out Pension Equivalent’ (COPE)?
As is clear from Box 1, it can be difficult to understand what ‘contracting out’ means, and how and why it affects your state pension. To try to clarify matters, the DWP has started including an additional figure on state pension forecasts. This is the ‘Contracted Out Pension Equivalent’ or COPE. Note that this figure is for information only, and you do not need to perform any additional calculations or deduct this figure from your state pension forecast – the DWP has already done this for you.
The basic idea of the COPE is to remind you that although you may not be getting a full state pension, you are getting an occupational or private pension and you benefited from a reduced rate of National Insurance Contributions in recognition of this.
The idea of the COPE works best for those who have been members of traditional salary-related company pension schemes. Consider the simple case of someone whose (contracted out) company pension promised to deliver at least £30 per week. They may find that they have been given a state pension forecast of £145.20, and may wonder why they are not getting the full flat rate of £175.20. But their state pension forecast will also mention a COPE of £30 per week which is a reminder that they will be getting at least £30 per week from their company pension. Taken as a whole, therefore, their income in retirement is at least the full flat rate of £175.20, and often much more.
The concept of the COPE is less helpful for those whose contracted out pension was a personal pension or any other ‘pot of money’ pension whose size depends on how the money was invested. In theory, when an individual contracted out and asked for their NI rebates to go into a personal pension, that money was invested and grew up to retirement in order to deliver a pension equal to the COPE amount. In reality, for many people the personal private pension that they are getting will be well short of the COPE figure. This is mainly because the amount of pension you can buy with a pension pot today is far lower than was expected when contracting out took place back in the 1980s and 1990s.
Step 3. To get your starting amount for the new state pension as at 6th April 2016, take the *higher* of Amount A and Amount B
Case study C: ‘Amount A’ is higher – large SERPS entitlement
All of Charlie’s years of contributions were prior to 6th April 2016. He has 37 years of contributions so would have got a full basic state pension under the old rules. He never joined a company pension scheme but was paid a good wage and built up a substantial pension under the SERPS scheme. For Charlie, the Amount A v Amount B calculation is as follows:
Full basic state pension £134.25
SERPS pension £65.00
TOTAL Amount A £199.25
Full flat rate pension £175.20
As Charlie’s ‘Amount A’ is larger than his ‘Amount B’, his state pension will be £199.25 per week.
Case study D: ‘Amount A’ is higher – extensively contracted out
All of Diana’s years of contributions were prior to 6th April 2016. She has 37 years of contributions so would have got a full basic state pension under the old rules. She joined a company pension scheme and was extensively ‘contracted out’ of SERPS, and only had a few years when she was building up rights under the SERPS scheme. For Diana, the Amount A v Amount B calculation is as follows:
Full basic state pension £134.25
SERPS pension £10.00
TOTAL Amount A £144.25
Full flat rate pension £175.20
Minus deduction for contracting out -£50.00
LEAVES Amount B £125.20
As Diana’s ‘Amount A’ is larger than her ‘Amount B’, her state pension will be £144.25 per week.
Case study E: ‘Amount B’ is higher – self-employed
Eddie was self-employed through his working life and all of his years of contributions were prior to 6th April 2016. He has 38 years of contributions so would have got a full basic state pension under the old rules, but his self-employed NI contributions did not bring him any entitlement to a SERPS pension. By contrast, his self-employed years count in full towards the 35 years needed for a full new state pension. For Eddie, the Amount A v Amount B calculation is as follows:
Full basic state pension £134.25
SERPS pension £Nil
TOTAL Amount A £134.25
Full flat rate pension £175.20
As Eddie’s ‘Amount B’ is larger than his ‘Amount A’, his state pension will be £175.20 per week.
Case study F: ‘Amount B’ is higher – long periods raising children
All of Fiona’s years of contributions were prior to 6th April 2016. She had a number of jobs but also spent a long time out of paid work at home with her three children. When she was in paid work she was building up a modest SERPS pension but no SERPS pension was accrued during those years with her children. However, she did get National Insurance credits for those years which count in full towards her new state pension. For Fiona, the Amount A v Amount B calculation is as follows:
Full basic state pension £134.25
SERPS pension £20.00
TOTAL Amount A £154.25
Full flat rate pension £175.20
As Fiona’s ‘Amount B’ is larger than his
‘Amount A’, her state pension will be £175.20
Step 4. Take account of qualifying years from 2016/17 onwards
If your starting amount as at 6th April 2016 is greater than, or equal to, the full flat rate then you cannot build on it by further contributions, and this is the amount of state pension you will receive.
However, if your starting amount is below the full flat rate, each full qualifying year from 2016/17 onwards will add 1/35 of the full flat rate to your pension entitlement. So, for example, if you have a starting rate well under the full flat rate, then if you work for two extra years post 6th April 2016, you will get an extra 2/35 of the full flat rate on top of your starting amount.
Case Study G: Impact of years worked post 6th April 2016
Gina does not reach pension age until February 2021. Gina’s working history is the same as Diana’s (case study D) prior to April 2016, so she has a ‘starting amount’ of £144.25 in today’s money. However, Gina has the advantage that she can go on contributing in 2016/17, 2017/18, 2018/19 and 2019/20 in order to add to her state pension.2 Each year post 6th April 2016 for which she contributes adds 1/35 of the full pension rate to her original starting amount. This calculation is shown below:
Gina’s starting amount based on her contribution record up to April 2016 is: £144.25 per week.
Gina does another four years of work. This adds 4/35 of £175.20 or £20.02 per week to her pension.
Gina’s total pension is £144.25 + £20.02 or £164.27 per week.
- As noted earlier, those with more than the full flat rate as at April 2016 cannot add to this amount, even if they pay NI Contributions for years from 2016/17 onwards;
- The amount in excess of the full flat rate is known as a ‘protected payment’; there are two special features of this protected payment which affect annual upratings and the ability to pass on part of your pension to a surviving spouse or civil partner:
- The amount of your state pension up to the full flat rate amount is uprated in line with government policy and at least by the growth in average earnings; but the protected payment is uprated in the same way that SERPS pensions are uprated, and this will generally only be in line with price inflation, currently measured by the Consumer Prices Index (CPI); as a result, different elements of your state pension will be uprated by different amounts;
- Although the new state pension is based around the principle of individuals building up pensions in their own right, if someone receiving a protected payment were to die, their surviving spouse or civil partner would be entitled to inherit 50% of their protected payment as an addition to their weekly state pension.
Your questions answered
The previous sections of this guide explain the basics of how the new state pension is calculated. In this section we answer some of the most commonly asked questions arising from these rules.
If I’ve been promised a pension above the new flat rate, will I still get it?
Yes. If, for example, you were expecting to get a full basic state pension under the old rules plus a substantial pension under the state earnings-related pension scheme, then by April 2016 you might already have been in line for a pension in excess of the flat rate of £175.20. If you had already built up more than this amount by April 2016, you will get the higher figure. However, you should be aware that you cannot add to this figure by contributions or credits for years from 2016/17 onwards. You will though have to go on paying NICs in the usual way even though you will not be adding to your pension.
My statement shows a COPE figure – do I need to take this off my pension forecast?
No. The COPE figure is for information only and has already been taken account of in your pension calculation. If you have been a member of a traditional salary-related pension then you should be getting a pension from that scheme (or schemes) at least equal to the COPE figure. If this is not the case it would be worth asking the Pension Service to explain where the COPE figure has come from. If you were a member of a ‘pot of money’ style pension (known variously as a Defined Contribution or ‘Money Purchase’ pension) then it is possible that the amount of pension you are getting from this source will be less than the COPE figure. Unfortunately you cannot do anything about this.
I’ve paid in more than 35 years, why don’t I get a full pension?
Almost certainly this will be because at some point you were a member of a ‘contracted out’ pension scheme and in those years you were putting less in to the system than someone who was not ‘contracted out’. For example, if you were a member of a salary- related pension then during the years in question you and your employer would have benefited from paying in a reduced rate of NI Contributions. In return, your pension scheme made a promise to replace part of the state pension you would have been building up if you had not been contracted out. Because of this deal, a one-off deduction is made from the new state pension to take account of the pension your employer has promised to pay. Note that with regard to occupational pension schemes it is whole schemes which decide to ‘contract out’ rather than individual members. This is why some people may not remember actively choosing to ‘contract out’ – to be a member of such a scheme you had to be ‘contracted out’.
Will I get any pension based on my spouse’s contributions?
The new state pension is based around your contribution record, not that of a spouse, so in most cases you will not benefit from your spouse’s contributions. The main exceptions to this, as noted in the previous section, are that you can still inherit part of the SERPS pension of a late spouse if they reached pension age before the new state pension was introduced. There are also a small number of married women (and widows) who once paid the married woman’s reduced rate of NI Contributions to whom special rules apply.
If I die, will anyone inherit any of my pension?
If you are getting less than the full flat rate state pension, no-one will inherit any of your new state pension when you die. However, if you are receiving more than the full flat rate, any excess amount is known as a ‘protected pension’ and half of this can be passed on to a surviving spouse. So, for example, if you are receiving a weekly pension which is £20 in excess of the full flat rate, your surviving spouse can inherit £10 per week. This inheritance should happen automatically once the death has been reported, though there can be a delay of many weeks before the new rate is put into payment. If so, any additional inherited amount should be backdated to the point of death.
Why are different bits of my pension uprated at different rates?
If you are getting a pension in excess of the full flat rate, different uprating rules apply to the slice up to the flat rate and the slice beyond.
The amount up to the full flat rate is uprated in line with government policy on pension uprating. By law this has to be at least in line with the growth in average earnings, though in recent years it has been in line with the ‘triple lock’ policy which applies an increase of the highest of the growth in earnings, prices or a floor of 2.5%.
The amount above the full flat rate – the protected payment – is uprated only in line with inflation, currently as measured by the Consumer Price Index (CPI).
What happens if I delay taking my state pension?
You are not obliged to take your state pension at state pension age. In the old system, those who deferred taking a state pension had an option of either drawing an enhanced pension when they did finally start claiming or of taking a lump sum (plus interest) reflecting the pension they had not taken. Under the new system, the lump sum option has been abolished. Those who defer taking their new state pension simply get an extra 1% on their pension for each nine weeks that they defer. This is equivalent to an extra 5.8% for each year of deferral.
Can I top up my state pension?
Where to find out more
Appendix 1 - Jargon Buster - some technical terms explained
Appendix 2 - How is the contracted out pension equivalent worked out?
1For brevity we will refer in this guide to ‘spouses’ but all references to spouses also include civil partners.
2Note that any contributions she makes in 2020/21 do not count, because she reaches state pension age during the course of 2020/21.
3More details of this special rule can be found at: www.gov.uk/government/publications/your-new-state-pension-explained/your-state-pension-explained.