State Pension Security
The state pension system (see State Pensions) is essentially the most reliable pension that you will find: the chances of the government filing insolvency and refusing to pay you an old-age pension are slim to none. Essentially a risk-free pension scheme, the government offers each UK citizen a basic State Pension. The value of the State Pension is based on the number of years that you have made National Insurance contributions, or N.I. contributions; these contributions are automatically deducted from your salary throughout your working life. Each year that you make N.I. contributions is recorded on your National Insurance record: this record is used on retirement to calculate how much basic State Pension you are entitled to receive. The more years of contributions on your record, the greater the State Pension you will receive.
The state pension system is likely to continue undergoing changes, and unfortunately most of us will be unable to influence the decisions made. The most that you can do is attempt to protect your state pension entitlement. In order to be entitled to the full basic State Pension, your National Insurance record must be complete. Currently you must make N.I. contributions for ninety percent of your working life to have a complete record. Your working life is calculated as the tax years of your life between age sixteen and the State Pension Age (see State Pension Age). The tax year goes from the 6th April to the 5th April the following calendar year. If you reach retirement age on or after the 6th April 2007 you need only thirty qualifying years to claim a full State Pension.
A qualifying year is a tax year of your working life when you earned enough to pay N.I. contributions, or were credited as having paid N.I. contributions. You have to contribute a certain amount for a year to count as a qualifying year. If you earn £4,524 or more during the tax year 2007/2008, and pay N.I. contributions on this amount, the tax year 2007/2008 will count as a qualifying year for you. Essentially, this system means you will need to work for at least thirty years of your working life (currently from age sixteen to age sixty years of age for women and sixty-five years of age for men) in order to have a complete National Insurance record and claim the full basic State Pension. If your record is incomplete, say if you have worked for only twenty years of your working life, you will not be entitled to the full basic State Pension. For this reason it is important to ensure that your record is as complete as possible.
Maintaining a complete National Insurance Record
Many people will be prevented from working at some point in their working life. You may stay at home to care for children or a sick relative, go to University or travel the world for a year. You might be working abroad or decide to do volunteer work. You may also be physically unable to work if you are injured or suffering from a severe illness or disability. In such cases it is nevertheless possible to ensure that your National Insurance record is complete. In certain situations you will be credited with having paid N.I. contributions although you have not done so. If you are unable to work because you are ill or caring for others, unemployed but seeking work, on maternity or adoption leave, on jury service or finishing secondary school, you may be entitled to National Insurance credits. For more information see National Insurance Credits.
If you are unable to work, but you do not qualify for National Insurance Credits you may qualify for Home Responsibilities Protection. You are entitled to Home Responsibilities Protection if you are receiving Child Benefit for a child under sixteen, receiving Income Support because you are caring for a disabled person (unless you receive Carer’s Allowance, in which case you will receive N.I. credits), or if you are acting as a foster parent or foster carer. Home Responsibilities Protection is not the same as National Insurance Credits, but in principle it acts the same way. Instead of giving you credit for contributions you did not pay, it reduces the total number of years that you are required to pay contributions in order to qualify for benefits including the State Pension. Thus if you are unable to work for three years and these years are recognised as qualifying for Home Responsibilities Protection, the number of years you need to pay contributions will be reduced accordingly, that is, by three years. For more information see Home Responsibilities Protection.
If you are unable to work but you do not qualify for National Insurance Credits or Home Responsibilities Protection, perhaps because you are travelling around the world, you can choose to pay voluntary N.I. contributions. You will be required to pay a certain amount of money to compensate for not paying regular N.I. contributions, currently £7.80 a week, but these voluntary contributions can be used to fill in gaps in your National Insurance record and will thus entitle you to claim the full basic State Pension on retirement.
The State Pension may seem a low priority when you are busy with other things such as caring for children or travelling the world, but ensuring that you have built up entitlement to a full basic State Pension is an important step to building a solid foundation for your total retirement income. For more details see Incomplete National Insurance Record. If you have questions or concerns regarding your State Pension, contact the Pensions Advisory Service on 0845 601 2923 or request assistance from an independent financial advisor.
