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Pensions in the UK
The New State Pension in a Nutshell
The new state pension is supposed to secure a subsistence level income for everyone in old age. The official retirement age is 65 years for men and 60 for women. By 2018, the retirement age for both sexes will be raised to 65 and by 2020 to 66. If you defer your retirement by one or several years, your state pension will increase.
To receive the full new state pension, you need to have paid contributions for 35 years or more. Under some circumstances, you can replace paid by “credited” contributions. For example, you will get credits for your state pension if you raise young children or care for elderly relatives.
If you can’t claim at least 35 years of National Insurance payments (or credits), you will only receive a pro-rata amount of the new state pension. For example, if you have paid into NI funds for a total of 20 years, you’ll receive two thirds of the maximum amount. However, if you contributed less than ten years, you most likely won’t qualify for any state pension.
In 2016/17, the new state pension for everyone reaching retirement age after 6 April 2016 is 155.65 GBP per week. This makes roughly 620 GBP a month for a British pensioner. Though this sum is raised by at least 2.5% every year, it’s hardly enough to cover the UK cost of living in major cities like London. However, there are still other options available to top up your state pension.
Filling Gaps by Voluntary Contributions
You may have gaps in your NI record if you don’t pay National Insurance and are also not getting any National Insurance credits for a time. Reasons for this may be durations of low earnings, unemployment without claiming benefits, or living abroad. If you haven’t reached state pension age yet and are worried you might not have enough NI records to qualify for state pension, you can make further Class 3 National Insurance contributions. These voluntary contributions allow people to fill gaps in their record and improve their state pension.
If You’ve Already Reached State Pension Age
Current pensioners can profit from the 18-month top up scheme since they are not eligible for the new state pension. If you have already reached state pension age, you can increase your pension by receiving an extra income with the state pension top up scheme.
You’re eligible if you
- are entitled for state pension;
- have reached state pension age before 6 April 2016.
With this top up scheme introduced in October 2015, you can increase your state pension by 1 GBP to 25 GBP per week. In exchange for that you need to make a lump sum payment before 5 April 2017. It is not known yet what will happen after this initial transition period of 18 months.
Put Aside Some More: Company Plans and Private Pension Schemes
To supplement state pensions, occupational pension schemes — funded by both employers and employees — are offered by many companies in the UK. By 2018, employers are even obliged to provide their employees with a workplace pension scheme, the so-called “automatic enrolment”.
Most company plans work roughly like this: you pay a certain percentage of your annual salary into a fund and use the accrued money to buy a pension when you retire. Those schemes profit from several tax benefits. For example, you pay the regular contributions for your occupational pension plan out of your gross income, rather than after taxation.
In addition to company pension schemes, lots of UK residents have a private pension plan, e.g. with an insurance provider. Some forms of individual pension schemes are also used for company pension plans. For instance, the HR department of a big employer can make use of “bulk buying” to purchase a group pension plan for their staff, with cheaper contributions and better conditions than an individual customer can usually afford.
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