Pensions in the United Kingdom

Contents

pensionTraditionally, there have been three major types of pensions in the United Kingdom:

  • State Pensions (including Basic State Pension and State Second Pension)
  • Occupational Pensions (including Defined Benefit Pension and Defined Contribution Pension)
  • Individual/Personal Pensions (including Stakeholder Pensions, Group Personal Pensions and Self-Invested Personal Pension)

In the year 2012, the following additional pension types were added:

  • Personal accounts
  • Automatic enrolment
  • Minimum employer contribution

Please note that the pension system in the United Kingdom is undergoing substantiation changes right now. It is therefore advisable to check with direct.gov.uk for current and updated information regarding UK pensions.

UK State Pension

The State Pension is a contribute-based benefit. How much you receive will be effected by your contribution history. For the year 2014/15, a person that had made National Insurance contributions for 30 years or more would receive a pension of approximately £113 per week. A person with fewer qualifying years gets a lower pension.

A married person can claim extra Basic State Pension based on National Insurance contributions made by their spouse. This is known s Category B pension. A man has to be born after 5 April 1945 to be able to claim a category B pension based on his spouse’s contributions to National Insurance.

Civil partners who reach State Pension Age on or after 6 April 2010 can claim Category B pension just like married partners.

Age addition

People aged 80 or more receives an age addition of 25 pence per week.

State pension age

golden yearsThe state pension age is presently 65 years for men. For women, it is currently in the process of being raised from 60 years to 65 years.

By 6 October 2020, the state pension age will be raised to 66 years for both men and women, as a result of the Pensions Act 2011.

Under the Pensions Act 2014, the state pensions age will be raised to 67 years for both men and women between by 6 April 2028.

Deferral

When you reach the state pension age, you can elect to defer your pension. A deferred pension will increase by 1% for every five weeks, which is the equivalent of just above 10% per year.

If you defer your pension, you get to decide if you want an increased pension paid out later or if you prefer to receive a lump sum. The lump sum consists of the amount of pension payments foregone plus interest at 2 per cent a year over the Bank of England base rate.

Flat-rate state pensions

The Pensions Act 2014, which received Royal Assent on 14 May 2014, has established that the Basic State Pension and Second State Pension will be replaced by a single, flat-rate pension by April 2017. However, in the 2013 budget it was announced that the introduction of a flat-rate pension has been moved to 6 April 2016.

The size of your flat-rate pension will depend on how many qualifying years you have. In order to get the maximum pension, you will need 35 qualifying years. If you have fewer qualifying years, you will still get a pension but a lower one, provided that you have at least 8 qualifying years. The fewer qualifying years you have, the lower you pension.

If you have already earned rights to a Second State Pensions greater than £37 a week, you will not lose these rights. You will get the flat-rate pension plus a so called “protected amount”.

Important milestones

  • Old Age Pensions Act 1908

retirementThe UK basic state pension (commonly referred to as “Old Age Pension”) was introduced in January 1909 following the passage of the Old Age Pensions Act 1908. Back then, the qualifying age was 70 and pensions were only available to low-income households. A person aged 70 or older with an annual income below a certain level would receive a pension of 5 shillings per week, while a married couple that fulfilled the requirements would receive 7 shillings and 6 pence per week.

  • The National Assistance Act 1948

After World War II, the National Assistance Act 1948 gave minimum income rights even to people that did not pay into National Insurance.

  • The early 1990s

In the early 1990s, several new laws were enacted that together established our current framework for state pensions in the United Kingdom. Examples of very important laws are the Social Security Contributions and Benefits Act 1992, the Superannuation and other Funds (Validation) Act 1992, the Pension Schemes Act 1993 and the Pensions Act 1995.

  • The Pensions Act 2004

The Pensions Act 2004 replaced the Occupational Pensions Regulatory Authority (OPRA) with a Pensions Regulator and relaxed the rules regarding minimum funding requirements for pensions.

  • Pensions Act 2007

The Pensions Act 2007 raised the retirement ages, and also kick-started to process of aligning the female retirement age with the male retirement age.

Until 2010, the retirement age for men was 65 years while the retirement age for women was just 60 years. From 2010, the retirement age for women has been in a process of gradual increase to bring it up to the same age as for men. This process will be finished in the year 2018.

  • Pensions Act 2008

The Pensions Act 2008 established automatic enrolment for occupational pensions. It also created the National Employment Savings Trust (NEST), a public fund manager for pensions.