22 Nov State pension statement
When considering how to meet your future lifestyle expenditure objectives, it’s worthwhile obtaining a state pension forecast to see how much regular income you might receive from the government. Most people tend to dismiss the state pension as ‘it won’t be worth anything when I get it’ or ‘it’s too small to make much of a difference’; however I’d argue that even a small amount of guaranteed income, particularly when added to other sources of income, can make a difference to your overall planning for how you are going to meet your future expenditure needs. Don’t forget that you are paying for this benefit throughout your working life, so it’s worth ensuring you know what you are going to get and trying to maximise the benefit.
You can obtain a state pension forecast via the government gateway and a link to apply for one, or to open a gateway account, is here https://www.gov.uk/check-state-pension
You can also apply for a forecast via a paper form, but this will obviously take longer – usually six weeks. A link to print the form can be found at:
When you receive your forecast, the next challenge is being able to understand what it’s telling you and what, if anything, you can do to improve your pension.
The forecast will provide you with an estimate of how much state pension you could get when you reach state pension age. It will also show the number of qualifying years you have, based on your National Insurance Contribution (NIC) record. In simple terms, the more NICs you’ve made, the greater your entitlement to the state pension.
You gain the benefits of NICs when you are in paid employment and are earning more than the lower earnings threshold. If you have been self-employed, you will have paid NICs if your profits were more than the small profits threshold.
When you use the ‘check your state pension’ facility via the Government Gateway, it will provide you with a state pension forecast for the date you are due to qualify for it, as well as a state pension figure based on your NIC records at the end of the last tax year. There is also an option to print your statement for future reference or to pass to your financial planner if you use one.
The webpage also has a link to check your NIC record, so you can check if you have any gaps or years which have been partially paid. If you do have gaps or part years you can usually only ‘top-up’ for the last 6 tax years, so it’s worth checking and considering whether this is beneficial for you before you time out.
At the bottom of the webpage, there may be a section titled “You’ve been in a contracted-out pension scheme”. This will relate to any time when you were contracted out of additional earnings related state pensions in the past, known as the state earnings related pension scheme (SERPS) or the state second pension (S2P). You might have been contracted out through a company pension scheme where both you and your employer paid lower rates of NICs, or maybe you had a NIC rebate paid into a personal pension plan.
The old state pension scheme had two elements: the ‘basic state pension’, paid in full to those with 30 years or more of NICs, and any earnings-related state pension built up from S2P, SERPS or the Graduated Retirement Benefit.
Contracting out into company defined benefit pensions was abolished in April 2016 and contracting out into personal pension plans or a defined contribution pension scheme was abolished in April 2012.
The new state pension, introduced in April 2016, has one flat rate based on how many ‘qualifying years’ you have accumulated during your working life. You need 35 or more qualifying years for the full amount. However, if you have were contracted out under the old state pension then you may have a deduction for these years as the earnings related benefits during this period should be provided by your private pension scheme(s).
If this appears on your state pension forecast webpage, click on the link to get your contracted-out pension equivalent (COPE) estimate. If it’s in your paper statement, the COPE is usually on page 2. It is for information only and has already been taken into account in your state pension forecast.
The COPE figure is effectively the amount of additional state pension you would have been paid if you hadn’t been contracted out, and is based on your NIC record up to 5 April 2016.
Therefore, if you have already paid or been credited with 35 years of NICs (or qualifying years), but you were contracted out for some of those years you won’t receive the full state pension. However, you might be able to reduce the COPE deduction if you pay additional NICs before you reach state pension age.
If you do not believe that you were contracted out, you can contact the Pension Service and ask them to explain where the COPE figure has come from.
It is also worth remembering that if you are due to receive less than the full state pension because you don’t have enough qualifying years, you may be able to top up your pension by paying voluntary contributions, known as ‘Class 3’ NICs. This is usually good value and make sense but does depend on your personal circumstances.
The state pension forecast is not guaranteed. It’s based on the current law and doesn’t include any increases due to inflation. It’s not a surprise that it comes with these caveats, but this doesn’t mean that it’s not worth obtaining an estimate and including it in your financial plan.
At Bloomsbury, we always include a person’s state pension in their financial plan and consider whether paying any additional NICs is worthwhile. It may not seem like much but, as I said earlier, a guaranteed source of income when living off your assets can make a difference. It’s worth seeing now what you might receive in the future so that you can consider, and obtain advice, on any options to increase your entitlement.