State Pension: Full guide to payments, eligibility and tax

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How much do you know about the State Pension?

Chances are, it’s less than you think.

You probably know that the amount of money you get depends on your National Insurance contributions.

But did you know for example that the State Pension is considered a benefit? Or that it’s considered taxable income?

I’ll be the first to say you don’t need to know literally everything there is to know about the State Pension – there’s no point.

So here are the essential bits, from who’s eligible to what you’ll get.

What is the State Pension anyway?

State Pension in the UK is a retirement benefit that’s paid every four weeks.

We’re talking about pensions, so of course it’s needlessly complicated – because there are currently three State Pensions.

The basic State Pension is the old system, and is applicable only to men born before 6 April 1951 and women born before 6 April 1953.

You get a flat rate of up to £169.50 per week if you’re eligible – and everyone who’s on this version of the State Pension will already have reached pension age.

Meanwhile, men born on or after 6 April 1951 and women born on or after 6 April 1953 will get the new State Pension on retirement – everyone yet to retire will be on this version of the State Pension.

The flat rate for this is up to £221.20 a week – but it can be more than this (more below under boosting your State Pension).

Some people might also receive an Additional State Pension, which is linked to contributions.

Although the Additional State Pension was a feature under the old system, some people who have since been moved onto the new system will still benefit from it if they made a contribution towards it before it was phased out.

Why is the State Pension considered a benefit?

Unlike private pensions, when you pay National Insurance contributions, that money isn’t going into your personal pot ready for retirement.

Instead, the money goes into the National Insurance Fund, which is used for all benefits payments.

And that’s how the State Pension was set up: as part of the UK’s social security system.

It means that even people who haven’t paid into the National Insurance Fund are eligible for the State Pension (more below under qualifying years).

Unlike other benefits though, it’s not means-tested, which means as long as you’re eligible, you’ll receive the full payment regardless of how much money you have.

As the basic State Pension and the Additional State Pension were both phased out with pension reforms on 6 April 2016, the rest of this guide will be focusing on the new State Pension and the rules that apply to those who haven’t reached pension age yet.

Who’s eligible for the new State Pension?

There are two simple eligibility requirements for the new State Pension.

The first is your age.

You have to be a man born on or after 6 April 1951, or a woman born on or after 6 April 1953.

This means that some people in this cohort will already have reached State Pension age.

The second eligibility criteria is the number of qualifying years you have on your National Insurance record.

You have to have at least 10 qualifying years to get any State Pension at all, and 35 years to get the full amount.

If you’ve moved to the UK from another country, you’ll qualify for the State Pension as long as you’ve met those two eligibility requirements. You don’t need to be a British citizen.

What counts as a qualifying year?

You can get a qualifying year on your National Insurance record in one of three ways:

• By working and making National Insurance contributions, even if you’re part time or self employed 
• By getting National Insurance credits, which applies to those on low incomes, were unemployed, ill, a parent, or a carer
• By voluntarily paying National Insurance contributions

You can check how many qualifying years you’ve accrued on the gov.uk website.

If you have any gaps in your National Insurance record, you can make a voluntary contribution to fill the gap.

This ensures you get the full State Pension on retirement.

However, you can only do this for the previous six years.

I would add that if you’re sure you’ll have at least 35 qualifying years when you retire – which will be the case for most people who don’t take significant amounts of time out of work – it might not be worth making a voluntary contribution.

You won’t get any more benefit from making that additional contribution, although it does contribute to the overall health of the fund.

How much is the State Pension worth?

If you have 10 qualifying years on your National Insurance record, you’ll get £63.20 a week under the new State Pension system.

This number goes up as you accrue qualifying years, and each qualifying year is worth about £6.32 a week.

However, payments are capped at £221.20 per week.

You hit this when you accrue 35 qualifying years, and you won’t get any more money even if you carry on making contributions for 40 or 50 years.

You can actually find out how much you’re eligible for on the same portal that you use to check your qualifying years.

Those figures are just what you can expect to receive right now, because the State Pension currently increases on the first Monday on or after 6 April each year.

And the amount the State Pension increases by each year is known as the State Pension triple lock.

What is the State Pension triple lock?

The State Pension triple lock rule was introduced back in 2011.

Under it, the State Pension must increase each year by the highest of the following three figures:

• Inflation, as measured by the Consumer Price Index (CPI) in September of the previous year
• Average wage growth from May to July of the previous year, provided by the Office for National Statistics (ONS)
• 2.5%

The idea is that the State Pension will always keep pace with the cost of living.

How much is the State Pension for a couple?

Under the new State Pension system, the amount of money you get is based on your National Insurance contributions.

This means you won’t get more or less money just because you’re married or are in a civil partnership.

However, you might be able to inherit some of your partner’s pension benefits if they die.

This only applies if they had previously paid into the Additional State Pension, or they have chosen to defer their State Pension payment.

You won’t receive their core State Pension payment – only anything over and above it that they might be due.

Can you boost your State Pension?

In theory, everyone who has made the same National Insurance contributions will get the same State Pension payout.

In reality, there are some exceptions.

For example, those who contributed towards the Additional State Pension before it was phased out will be entitled to a slightly higher payment.

You can also defer your State Pension to receive a higher payout.

How does deferring your State Pension work?

State Pension payments are not automatic.

When you reach State Pension age, you have to actually apply to claim the benefit.

If you don’t make a claim, you automatically defer your State Pension, which over time can boost what you’re entitled to.

You have to delay your claim by at least nine weeks before your State Pension entitlement starts to increase.

After those first nine weeks, your State Pension entitlement will increase by 1% every nine weeks you delay your claim, or about 5.8% every 52 weeks.

Assuming you’re normally entitled to £221.20 a week, if you defer your State Pension by a year and nine weeks, your weekly payment would go up to about £234.03 a week – that’s worth an extra £667.16 a year based on current figures.

Of course, the longer you defer your State Pension payment, the bigger the boost to your entitlement.

If you don’t need the money straight away and you think you’ll live a long life, it might be worth doing.

It might also be worth doing if you have a big private pension since pension income – even the State Pension – is taxable (more below under paying tax on the State Pension).

When you do start receiving State Pension payments, the boost is paid as an extra payment on top of your regular State Pension.

Some of this extra payment can be inherited by your spouse when you die.

When do you get the State Pension?

What’s the State Pension age? Well, it depends on when you were born.

The State Pension age is currently 66, but it’s going up in stages to 68.

It means people born in different years (and even different months of the same year) will have different State Pension ages.

If you were born before 5 April 1960, but after 6 October 1954, your State Pension age is 66.

If you were born between 6 April 1960 and 5 April 1977, your State Pension age will be somewhere between 66 and 67.

If you were born between 6 April 1977 and 5 April 1978, your State Pension age will be somewhere between 67 and 68.

And if you were born after 6 April 1978, your State Pension age will be 68 – though of course who knows what this will be when you actually come to retire.

The easiest way to check is to put your date of birth through the State Pension age calculator on the gov.uk website.

What if you want to retire early?

If you love to travel like me, you’re probably feeling a bit miffed.

Afterall, retiring at 68 doesn’t give you much time to live your best life, especially when most travel insurance doubles when you reach 70, which can make holidays abroad prohibitively expensive.

No wonder, then, people choose to retire early.

Because actually, you can choose to retire any age you like – as long as you can afford to.

It’s worth bearing in mind though that you won’t be able to access your private pension until you’re at least 55, or 57 from 6 April 2028.

So if you want to retire before then, you’ll need to have other funds (savings for example) to cover your living expenses.

Read this: How to create your own financial plan

Is the State Pension taxed?

One reason why I really like the Lifetime ISA is that everything you save into it is tax free but you still get a 25% government bonus, making it a viable alternative or addition to traditional private pensions.

Because this is the thing that many people don’t realise: pension payments are taxable as income, and this includes the State Pension.

This means everything above the personal allowance of £12,570 a year is subject to income tax at your marginal rate.

So you’ll pay 20% on annual income between £12,571 and £50,270; 40% on the portion between £50,271 and £125,140; and 45% on anything over £125,140.

Read this: Why I put the minimum amount of money into my pension

How do you pay tax on the State Pension?

You may have noticed that £221.20 a week works out to be £11,502.40 a year, which is below the threshold for income tax.

And so the State Pension is paid without the tax deducted – because it assumes in some respects that this is your only source of income on retirement.

If you have other sources of income, your State Pension payment will be taken into account and you’ll pay tax on your total earnings.

So for example if you also receive income from a private pension, the tax you pay will be based on the total sum you receive from the private pension and your State Pension.

Any tax you owe will be taken off by your private pension provider.

Similarly, if you’re still working, the tax will be taken off by your employers.

And if you’re self employed then you’ll have to fill in a tax self assessment.

Read this: Your ultimate self employed pension guide

How do you apply for the State Pension?

As mentioned earlier, you don’t automatically receive the State Pension – you have to apply for it.

About four months before you reach State Pension age, you should receive an invitation letter with a code as well as instructions for making your application.

If you don’t receive a code and you’re within three months of reaching State Pension age, or if you’ve lost the code, you’ll be able to request a new one on the gov.uk website.

Using this code, you can make an application online, on the phone or by post.

You’ll need to have your bank details to hand.

You may also be asked the dates of your most recent marriage, civil partnership or divorce and the dates you spent living or working abroad – basically things that might affect how much State Pension you receive, or the tax you owe.

After you apply, you should receive a document confirming how much State Pension you’re entitled to.

Once you start receiving the State Pension…

You can’t just ride off into the sunset when you start receiving your State Pension.

Like any other benefits claims, you’ll have to let the Pension Service know when your circumstances have changed.

This includes if you have moved to another address (including to another country or a care home), if there’s a change in your bank details, legal relationship status (marriage/civil partnership, divorce, widowhood), or if there’s a change in other benefits you might be receiving.

Your State Pension will also be temporarily halted if you go to prison – and yes, you need to let the Pension Service know this, too.

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