The new, simpler state pension is in fact highly complex and confusing. Even the advisers who answer the Government’s helpline are confused!
Most people who reach state pension age in the next few years will get less than the so-called flat-rate pension of £155.65 a week. But many will be able to boost their pension towards the full amount by paying National Insurance (NI) contributions in the tax years between now and when they reach state pension age.
To take advantage of this scheme you must reach state pension age in 2017/18 or later – women born on 6 July 1953 or later or men born on 6 April 1952 or later. Those reaching state pension age this tax year or earlier cannot boost their pension in this way.
The people affected have a big deduction made from the new state pension because of years they spent paying into a pension at work or a personal pension. When they get their state pension forecast there will be a deduction made from it called Contracted Out Pension Equivalent or COPE. But that deduction can be reduced by paying extra NI contributions now.
This deduction is made for people who paid into pensions that were called ‘contracted out of SERPS’ because they did not pay into the State Earnings Related Pension Scheme (SERPS) and paid lower NI contributions. Their contracted-out pension was supposed to replace the SERPS part of the state pension.
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There are three groups of people who were contracted out of SERPS:
1. People employed in the public sector – nurses, teachers, police and fire officers, civil servants, armed forces, and most others who worked for the state.
2. Those who worked for a firm with a good pension scheme that promised a pension related to their pay, usually called ‘final salary pensions’ or ‘defined benefit’ schemes.
3. Some people who paid into a personal pension and were persuaded by the person who sold it to them to ‘contract out’ of SERPS.
Anyone who was contracted out of SERPS will have that COPE deduction made from their new state pension, to take account of the pension they paid for with the contributions not paid into SERPS.
The deduction can take a big chunk of the new state pension. If it is below what you would have been paid under the old rules, you’ll receive that ‘old rules’ pension, as little as £120 a week.
But… the COPE deduction can be reduced. Every year of NI contributions you pay, from 2016/17 to the tax year before you reach state pension age, will add extra to your pension.
If you are working and earning at least £112 a week you will get a NI contribution for each week’s work. If you earn less or you don’t work, then you can pay Class 3 voluntary contributions. They cost £733.20 a year. Each extra year you buy will boost your pension by £4.45 a week or £231.25 a year, so payback time is short. The extra pension will be increased at the same rate as the rest of the new pension.
Many people say they have already paid 35 years of NI contributions or more and so should have a full new state pension. Some have paid 35 years in jobs where they were not contracted out. None of that matters. These extra payments are on top of any you have already paid to reach 35 years. NI contributions paid on top of past payments help to reduce the COPE deduction.
What to do next
Ask DWP for a state pension statement at gov.uk/check-state-pension; 0345 3000 168.
If your pension has a COPE deduction you could benefit from this scheme. If you do not earn more than £112 a week consider buying a year’s contributions for 2016/17 after April 2017. Go to gov.uk and search ‘Class 3’; 0300 200 3500. If you will reach state pension age in 2018/19 or later, wait until you are close to state pension age and consider then paying the contributions back to 2016/17 if you did not pay them at work.
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