New State Pension – Did you pay contracted-out NIC?
The State Pension changed for people who reach State Pension age on or after 6 April 2016. This is men born on or after 6 April 1951 and women born on or after 6 April 1953. The intention was to make the rules simpler and enable people to plan for their future by ensuring they know how much State Pension they will receive. Currently, the full new State Pension is £159.55 per week, but if you were an employee who paid National Insurance contributions (NIC) at the contracted-out rate this could affect the amount of State Pension you will receive in the future.
What is the new State Pension?
The new State Pension was designed to be simpler and more easily understood by replacing both the Basic State Pension and the State Second Pension, and their predecessor schemes, with a single benefit. It has been necessary, however, to have transitional arrangements to ensure that entitlements from these earlier schemes are still taken into account.
The new state pension continues to be based upon National Insurance contributions.
Much of the publicity published at the time the new State Pension was introduced quoted a single figure for the amount of the pension, which may have led some people to believe that they would receive this amount. This may not be the case as some people may receive more and others could receive less than the full amount. In the early years of the new State Pension your National Insurance record from the old scheme will be taken into account.
To gain entitlement to the full amount, a person entering the workforce will require 35 years of National Insurance contributions or credits. To qualify for the minimum amount, 10 years of National Insurance contributions are required. More information on National Insurance contributions and credits can be found on our website.
For those people who were already in the workforce at April 2016, transitional arrangements were put in place which means that everyone will be assessed for their starting amount under the new system. Using the qualifying years on your National Insurance record as at 5 April 2016, your “starting amount” will be the higher of either:
- the amount you would get under the old State Pension, or
- the amount you would get if the new State Pension had been in place at the start of your working life.
Both amounts will reflect any periods when you have been contracted out of the Additional State Pension.
The rules around contracting out and new state pension are complicated. Detailed guidance on how the transitional arrangements apply and examples can be found on GOV.UK.
If you have a “starting amount” of less than the full amount of new state pension then for each “qualifying year” you add to your National Insurance record after 5 April 2016 a certain amount (about £4.56 a week, this is £159.55 divided by 35) will be added to your ‘starting amount’, until you reach the full amount of the new State Pension or you reach State Pension age, whichever happens first.
For some people it is possible to have a starting amount higher than the full new State Pension if you have some Additional State Pension. The difference between the full new State Pension and your ‘starting amount’ is called your ‘protected payment’. For those who have a ‘starting amount’ which is equal to the full new State Pension, you will get the full new State Pension when you reach State Pension age.
What was contracting out?
Under the old system, the state pension was made up of two parts:
- The basic state pension, and
- Additional state pension, sometimes referred to as state second pension or SERPS (State Earnings-Related Pension Scheme).
If you were in what is known as a defined benefit company pension scheme – where what you are paid in retirement is related to your salary – you are likely to have been 'contracted out' of the additional state pension. This means that you would have paid a lower rate of National Insurance contributions and will have earned replacement pension benefits in an employer scheme or a personal pension.
Those affected will include public sector employees – civil servants, NHS employees, police officers, teachers and members of the armed forces.
Despite having what you thought were 35 years of National Insurance contributions you will not necessarily get the new state pension amount of £159.55 – although as noted above you can improve your entitlement by paying contributions after 5 April 2016. The Government has advised that while you'll get less than the full £159.55, retirees will still be paid at least what they would have got under the old state pension.
The introduction of the new state pension from 6 April 2016 brought an end to the contracting-out rules.
Checking if you were contracted-out
Many people may not have realised that they were contracted-out. One way to check would be to look at an old payslip – one from before April 2016. If it shows the letter “D” or “N” on the National Insurance line then this means you were contracted-out. Letter “A” would mean you were not contracted-out.
If you have or previously had a married woman’s reduced rate election and were contracted-out your payslip would show the letter “E”. Letter “B” would mean you were not contracted-out.
From 6 April 2016, no-one can be contracted-out.
Checking your pension entitlement
There are a number of ways to check your state pension entitlement – online, by phone or post. You can find out how much state pension you could get, when you can get it and how you can increase it on GOV.UK.
There are different ways to check your National Insurance record – via your Personal Tax account, online or by phone. Full details can be found on GOV.UK.
If you are an authorised agent acting on behalf of a client you can use the link above to check National Insurance record and under the heading “Other ways to apply” select the online option. Alternatively, you can use the National Insurance Helpline on 0300 200 3500.
More information is available on gov.uk using the following links:
GOV.UK – Your State Pension explained (pdf)