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State Pension

By: EconomyWatch Date: 22 September 2009

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The most important financial decisions one is likely to make in his/her life are those concerning his/her retirement. To have a secure future with a comfortable standard of living after one has stopped working, careful financial planning is required.

Pensions are becoming more and more important as people now live longer into their retirement. Lifestyles have also changed, people often take out mortgages later in life than they used to, meaning that they may still have a mortgage to repay when they stop working. And as people are experiencing better health and longer retirements, they want to have a reasonable amount of disposable income in order to enjoy more leisure activities in their later years.

The basic state pension is paid to men at the age of 65 and women at 60, who fulfill the National Insurance (NI) pension contribution requirements. However, the rule will change from April 6, 2010, when the state pension age for both men and women will become 65 years. The weekly state pension for a single person is ₤95.25 and for a couple is ₤152.30.

Eligibility for Basic State Pension

For men, the qualifying working life for state pension should be 44 years and for women, 39 years. From April 6, 2010, the qualifying period for full state pension will be reduced to 30 years for both men and women. Ideally, the entitlement is calculated according to the number of national insurance contributions one has made during the qualifying years. In order to receive full state pension, one needs to work and contribute for around 90% of his/her adult working life.

The contribution record of people who have been unable to work due to unemployment, sickness or responsibilities are generally covered by credit or a protection act.

Additional State Pension Schemes

SERPS (State Earnings Related Pension Scheme): SERPS was the UK’s second pension scheme till 2002. It allowed anyone earning more than ₤75 per week to make additional national insurance contributions. However, SERPS was not friendly to the low income group and people with employment gaps. As a result, it was decommissioned.

Second State Pension: The second state pension scheme is also linked to earnings, but is calculated in a way that it provides better support for low income or out of work individuals. The government usually tops their credit by a flat amount.

In addition to savings for one’s life in retirement, state pension schemes also forecast the amount of entitlement a person will receive and aid in strategic financial planning.