State Pensions

Basic State Pension

If you're working, you are usually paying National Insurance Contributions (NICs). This means you are building up the right to get a basic State Pension when you reach the State Pension age. This is 65 years for men and between 60 and 65 years for women, depending on when you were born.

You get a smaller basic State Pension if you haven't paid enough NICs of the right type. You may not get a State Pension at all if you've paid less than the minimum. But, in some cases, if you're not working, you may be credited with NICs. In other cases, you can choose to pay voluntary contributions. Your local social security office can tell you if you are entitled to credits.

The basic State Pension in 2005/06 is £82.05 (single) and £131.20 (couple). The government usually increases the basic State Pension each year in line with the Retail Prices Index (RPI), so it should keep up with prices in the future, but not with average earnings.

Additional State Pension

Since 1978, if you are (or have been) in employment you may also be building up an additional State Pension. This is called the State Second Pension which replaced SERPS (State Earnings Related Pension Scheme) in 2002.

Your State Second Pension entitlement could be as much as or greater than your basic State Pension when you retire. The amount of State Second Pension you get depends on your earnings and your NICs record throughout your working life.

The State Second Pension, like SERPS, is earnings-related. But anyone with earnings less than a specified minimum, set by the government, will be treated as if they were earning at that minimum level and so get a boosted State Second Pension.

Self-employed people cannot build up a pension through the State Second Pension or SERPS.

Contracting out of the State Second Pension

If you are an employee, you are automatically included in the State Second Pension unless you decide to leave it (called ‘contracting out’).

If you are contributing to your employer’s occupational pension scheme, it may be a ‘contracted-out’ scheme – check your scheme.

If you decide to contract out:

You give up your State Second Pension entitlement and build up a replacement for it in your own pension instead (for example, in a stakeholder or personal pension).
HM Revenue & Customs will pay a rebate of part of your National Insurance contributions into your stakeholder or personal pension.
You will continue to be contracted out of the State Second Pension, unless you decide to contract back in. You can review your decision to contract back in whenever you want.

If you are contributing to your employer’s occupational pension scheme and it is a contracted-out scheme, you cannot contract back in so long as you continue to contribute to that scheme.

It's important that you review your decision to contract out every year. Circumstances change from time to time and the reasons for your decision to contract out may no longer be valid. The advantages and disadvantages to being contracted out of State Second Pension vary from individual to individual.

For more details about State Second Pension and contracting out please see our fact sheet: The State Second Pension and contracting out. Go to Consumer Publications.

In addition, the Association of British Insurers and the Association of Independent Financial Advisers have produced a fact sheet called "Contracting out: it's your choice".

If your pension provider has not sent you a copy of this fact sheet, you can get a copy from this link: ABI Factsheet - Contracting Out It's your choice

If you are in any doubt about your pension arrangements, or you do not understand the complexities of the available schemes, then talk to us at Surrey Financial Advice. We can help guide you through the maze, get a basic understanding of your best options and help you to arrange them if required. There are now potentially quite large advantages to be gained from a pension arrangement, unlike any other form of investment in the UK, but there are also some disadvantages which you should be aware of before you make your decision.

Remember, with Surrey Financial Advice, any initial consultation is free of charge (apart from a cup of coffee, perhaps) and you are under no obligation to proceed. [Contact us]