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State Pension

Although we often think about private and company schemes when discussing UK pensions, it should not be forgotten that there is also a state pension in place. This is one scheme that, it seems to us, generally gets less coverage than it should do.

In fact, most of us may only give it some thought when it's being mentioned that changes are to be made. For many UK pensioners, however, the state pension offers a real lifeline. So how does it work? Let's take a closer look.

The amounts involved

The state pension is there to help you in your retirement. Most people can claim some level of pension, although it's worth remembering that the amount that you receive may not cover all of your lifestyle needs in retirement.

Indeed, depending upon the type of lifestyle that you expect, you may find that it falls well short. That's why many individuals turn to private alternatives to provide that bit extra.

So how much are we talking about here? Well, at the time of writing, the maximum weekly amount that an individual can receive in tax year 2010-2011 is £97.65.

The actual amount that you will receive will depend upon how many qualifying years of National Insurance you have built up.

About National Insurance (NI)

Have you ever thought much about National Insurance? If you're in employment then you probably spot the fact that you pay National Insurance to the government when you get paid. It's usually taken at source, meaning that you don't necessarily feel the impact. Although you are aware, we're sure, that it means that you take home a bit less money than would otherwise be the case.

All the time that you make these payments, you're building up a history. You're being credited with paying National Insurance. As a result, you're putting yourself in position to claim the basic state pension.

But what about if you're not making these payments? There may be times when you're unable to do so. In particular, you may not be able to due to illness, or periods of unemployment. In such situations, the government will step in and give you credits.

The credits system is more complicated for some people. For full details, you can get information online from the Directgov website.

The additional state pension

The state pension is actually made up of two parts:

1. The Basic State Pension

2. The Additional State Pension

So which one will you receive? The answer depends upon your National Insurance contributions. In order to qualify for the basic state pension, you need to have made NI contributions for a certain amount of time.

Once you've made contributions for that period, any additional contributions that you make go towards the additional state pension. But you need to be aware that, under some circumstances, you may have been "contracted out" from receiving the additional state pension.

The state pension age

The State Pension age for men currently stands at 65. On 6 April 2010, the state pension age for women started to rise. It will go up gradually, from 60 to 65, meaning that it will eventually equal that of men.

There are also proposals in place for a new pension age. These would affect you if you were born between 6 April 1953 and 5 April 1960.

What are the implications of these proposals?

For women, the main initial impact will be that the rise of the state pension age for women (from 60 to 65) would accelerate between 2016 and November 2018.

From December 2018, there would be a further acceleration, which will make a difference for both men and women. By April 2020, the state pension age for both would be 66 years of age.

There's also consideration being given to further increases. Present thinking appears to be that a timetable will be put in place, allowing the pension age to rise to 68 for both men and women.

More about pensions

Our pensions guide pages cover many of the basics on this subject.