Traditionally, women have got lower state pensions than men. This is partly because some women historically paid lower National Insurance contributions but largely due to women having broken work patterns caring for children or family members who are disabled or elderly.
But many changes are imminent. The next decade will see the state retirement age for women increase, the qualifying period for a full basic state pension reduce and the rules for buying additional NI credits change.
These developments mean many women will get higher state benefits in future but the impact varies, meaning that advice is not straightforward.
Between 2010 and 2020, the state pension age for women will gradually increase from 60 to 65 to bring it into line with men’s state pension age. The staged increases will apply to women born between April 6, 1950 and April 5, 1955. Then, from 2024, the state pension age for both men and women will gradually rise from 65 to 68 by 2046.
Another significant alteration means that, from April 2010, people only need 30 years of NI contributions or credits to get a full basic state pension rather than the current 44 for men and 39 for women. There is no phasing of this change so if a woman reaches her 60th birthday on or before April 5, 2010, she will still normally need 39 years to get the full pension while a woman whose 60th birthday is a day later on April 6, 2010, will only need 30 years.
Staying in employment and not retiring until after April 6, 2010 will not help as date of birth is the determining factor, not the actual date of retirement.
A related change sees the introduction of a new carer’s credit, which will help mothers and carers qualify for larger state pensions. These credits will be payable on a weekly basis, meaning that someone caring for a part of a tax year will get protection where they currently do not. The reduction in qualifying years and the revised carer’s credit should see a significant increase in the number of women qualifying for a full basic state pension. In 2008, 60 per cent of women did not get a full basic state pension compared with only 12 per cent of men. But the quid pro quo is that this will often be paid five years later. Women who do not qualify for a full state pension can usually fill gaps in their record during the previous six years by paying voluntary NI contributions. This helps boost the level of basic state pension they will get.
In addition, people who reach state pension age between April 6, 2010 and April 5, 2015 and already have 20 qualifying years may be able to buy an additional six years’ contributions for tax years from 1975/6 onwards. This may particularly help women who took time out of work to have children in the late 1970s or early 1980s.
Each extra year that people are credited with increases their basic state pension by 1/30th of the full amount. In 2009/10, the full basic state pension is £95.25 a week so a 1/30th increase is around £3.15. The cost of buying this extra year is £12.05 a week or £627 a year.
In return, a woman would get an extra state pension of around £164 each year for life. Based on current annuity rates, it would cost around £5,500 to buy an ann-uity of £164 for a 60-year-old woman, yet the cost of buying this level of benefit through additional NI contributions is only £627. So a very good deal can be had.
But this will not be suitable for everyone. Perhaps obviously, voluntary contributions cannot increase the basic state pension above the full rate, so those who will have 30 years’ NI history should not consider this option. In addition, those who may fall back on means-tested benefits in retirement may see little or no benefit.
It is important that all women are aware of the upcoming changes, how they will be affected and the options available. An obvious move is to get a state pension forecast from the Government which will confirm their NI contribution history. But this is only the starting point and the best route will then depend on an individual’s circumstances, giving a clear need for advice.
Andrew Tully Senior pensions policy manager Standard Life