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State pension rules and what they mean

By Raymond Mulligan

Q : Can you please explain the rules behind the state pension? My understanding was that everyone received the same amount at the same retirement age.

A: I am finding more and more people are confused regarding their entitlement to the state pension.

As with everything, it is getting more complicated to understand and recent changes to the legislation mean that it is getting even more complex.

All these changes are not necessarily for the better, however, so it is important that you understand what you are entitled to and when you should expect to receive it.

The state pension age is currently 65 for men and 60 for women. However, one of the changes made some time ago was that for women, the age at which you are entitled to receive it will increase gradually from next year, so that by 2020 it will be 65. The increase in the state pension age will not affect women born on or before April 5, 1950.

Women born between April 6, 1950 and April 5, 1955 will have a state pension age of between 60 and 65.

Women born on or after April 6, 1955 and before April 6, 1959 will have a State Pension age of 65.

However, the changes to when you are entitled to receive your pension do not stop there. For both men and women the age at which you are entitled to draw a state pension will increase from 65 to 68.

This is to happen in phases and will come into force after 2024. The first increase, from 65 to 66, will be phased in between April 2024 and April 2026; the second, from 66 to 67, will be phased in between April 2034 and April 2036, with the final implementation from 67 to 68, between April 2044 and April 2046.

All these age related issues are down to the fact that there is an ever increasing financial burden being placed upon the state to provide a pension entitlement, at a time when the overall financial position of UK plc is under severe pressure.

It also makes the changes announced by Margaret Thatcher, when she was in power, to link future increases in pension to inflation rather than average earnings, pale into insignificance.

The amount that you will receive as a state pension will ultimately depend upon your history of national insurance contributions and the type of pension arrangements you have been part of throughout your working life. Each individual will receive a basic pension which will be topped up by an additional state pension, the most common being known as SERPs.

You may or may not be entitled to this additional amount due to the fact that many people at the time elected to contract out of the government’s scheme in preference to having their national insurance contributions redirected into a private arrangement.

Again recent changes that have come into force mean that if you have any gaps in your entitlement, then you may wish to consider paying an additional amount in order to make up that shortfall.

The overall amount you receive can also be enhanced if you select to defer your entitlement to a later age.

State pension deferral simply means putting off claiming your state pension when you reach state pension age, or choosing to stop claiming it after you have already begun claiming.

This allows you to build up extra income or a taxable lump-sum payment.

In order to find out your exact entitlement and the age at which you should receive benefits you should consider applying for a pensions forecast.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact or (028) 9022 1010

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