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Malcolm McLean: 10 state pension mistakes clients make

Despite the arrival of a new state pension, we still have the old one running alongside it, and the added complexity this brings

For many people, the state pension is the bedrock on which private pension provision is based. How to qualify, how much it will be and at what age you can expect to get it are all factors that must be taken into account by individuals and those advising them.

Despite the recent arrival of a shiny new state pension, we still have the old one running alongside it, and the added complexity this brings.

Uncertainty also exists around the timing of future state pension ages and what impact this will have on private pension planning.

There are many myths and misconceptions about the state pension rules which need to be corrected. Here are 10 of the biggest.

1. You have to retire before you can get the state pension
Not true. There was originally an earnings rule in place but this was dropped in the 1980s.

Now there are only two conditions: that you have reached the designated state pension age and have the necessary number of qualifying years of National Insurance under your belt.

2. You can get an “early retirement” reduced-rate state pension between age 55 and your normal SPA
Not possible, I am afraid. So-called actuarially reduced early retirement pensions are only available with some private and public service pensions, not the state pension.

3. You do not have to pay tax on your state pension
You may have to pay tax on some or all of it. Your state pension is treated as taxable income and added to any other taxable income (e.g. private pensions, earnings and so on) that you may have. Any excess after deduction of your personal tax allowance (currently £12,500 a year) is then subject to income tax in the normal way.

4. The new state pension, which came in from 6 April 2016, is a flat-rate one
It is certainly the intention over the longer term to have a single flat-rate state pension which most people who fully satisfy the NI conditions will receive. However, because of the rather complicated transitional arrangements necessary in moving from the old system to the new in 2016, there are currently some people who will receive more than the flat rate (because of substantial Serps/S2P holdings) and others who will receive less (either because of missing NI contributions or due to “contracting-out deductions”).

5. You need 35 years of NI contributions to receive the full rate of the new state pension
Broadly correct, although there will be some people for whom the bulk of their NICs were made under the old system in the years preceding 6 April 2016. They may find they have more than 35 years in total but still fall short of qualifying for the full pension.

6. You can always plug gaps in your NI record by opting to pay voluntary Class 3 contributions
Not always. It depends where the gaps are. Normally, you can go back six tax years for the purpose. But, as indicated above, be wary of paying Class 3 NI for periods prior to 6 April 2016 where you may already have enough (30 years) to satisfy the conditions under the old system. Your extra contributions will count for nothing in that event.

7. Reduced-rate NICs payable under the old “married woman’s option” count in aggregate towards the state pension
Completely wrong. These types of contributions, which were phased out for newly married women in 1977 but retained in some cases for existing contributors, do not count at all for the state pension.

8. NI credits are allowed automatically if you are at home looking after children
Not quite. NI credits are awarded automatically if you are a parent registered for child benefit for a child under 12 – even if you do not receive it – but not otherwise.

9. Your state pension goes up by 1 per cent for every nine weeks you defer taking it, giving you an increase of 5.8 per cent after a full year
Correct for those entitled to receive the new state pension, i.e. people who reached their SPA on or after 6 April 2016. The rules are different, however, for those who reached their SPA before 6 April 2016. They receive 10.4 per cent a year for deferring, roughly double today’s 5.8 per cent.

10. Deferring your state pension is only an option at SPA before you start to draw your pension
Not true. You can opt to stop and restart payments of your existing state pension at any time, although you can only do it once. This appears to be a little-known option for boosting the level of a state pension.

Malcolm McLean is senior consultant at Barnett Waddingham



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Andy Robertson-Fox 8th May 2019 at 2:29 pm

    Mistake number 11 – My state pension is uprated annually wherever I live in retirement. No, only if you live in the UK, EEA country or one of fourteen countries with which the UK has an (unnecessary) agreement that allows it. This disgraceful, irrational and illogical policy is called the frozen pension policy and means that one is limited to the level of payment at which the pension is first paid in the frozen territory.

  2. What a great article, admittedly I knew most of this, but I didn’t know you could stop and start your pension after you were already drawing it.

  3. I think the option to allow one stoppage once in payment is only for pre 4/2016 SPA?

    You’d have to question why you would want to postpone post 4/2016 as if you don’t need the money and/or want to reduce your current income tax bill then sticking the dosh in a pension is likely to be a better option for most (assuming LTA/AA hasn’t been maxed out) especially for inheritance terms.

    The reason it’s not widely known is that the info isn’t easily available.

    What I also like about this article is that any gov bodies that might see it may look to improve the info on their websites including adding a FAQ’s section.

  4. As a matter of interest between October 2015 and 5th April 2017 you could top up via voluntary Class 3A NI contributions up to £25 per week.

    For example at age 70 a contribution of £779 would have bought £1 a week extra. That is a return of 6.8%. Pretty good if you just had money laying about in a cash account.

    Regrettably few advisers knew about this and I suspect those that did kept quiet as they thought that they couldn’t earn on the advice. (Fees would have been perfectly appropriate).

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