BeeHive > BeeLines > Back to basics 1 - The basic state pension
Back to basics 1 - The basic state pension
Part of what I was picking over in the BeeLine about the Pension Credit was the fact that the BSP is not the universal benefit many people seem to think it is. It is a contributory pension of a strange sort, in that the amount of pension you get at retirement is based on the number of contributions you make during your working life and not the amount of those contributions. If you know all this already, by the way, please forgive me. It’s just that I think everyone should know these things, so I’m just writing them down. It’s good to get it all out of my head and onto paper anyway, all this pensions stuff is just cluttering the place up in there.
To get a full Basic State Pension when they reach State Pension Age people need to have a full contribution record. The rules governing this, as you would expect, are fairly tricky to get your head round, and have been devised by the Government types in the usual way we’ve all come to know and love. For a start, a contribution record doesn’t necessarily have to be a record of contributions, in fact you can get a full contribution record in years when you don’t make any contributions and get no contribution record in years when you do contribute, but don’t contribute enough. I’ll explain.
To get the full rate of BSP men need to rack up at least 44 qualifying years out of the maximum of 49 (ie from age 16 to age 65). So a full contribution record is clocked up for you if you’re a man and you’ve got at least 44 qualifying years under your belt. A qualifying year is one where you have paid Class 1 National Insurance Contributions on earnings of 52 times the weekly Lower Earnings Limit (which in the 2003/4 tax year is £77). People who are self-employed do the same thing differently by paying Class 2 National Insurance Contributions (currently £2 a week). People who haven’t got earnings and have a good reason for that, for instance they are in receipt of incapacity benefit or maternity allowance or something can get weekly credits that count in lieu of National Insurance Contributions. The exact rules governing who gets credits and when and for what are, as you would probably expect, mind-bogglingly complex, so I’m not going to list them out now or we’ll be here all day. The credits are equivalent to people having been earning exactly the Lower Earnings Limit, but that doesn’t matter because the Basic State Pension is also redistributive.
What I mean by that is the amount you pay doesn’t count. It’s the number of payments you make (or are credited with) that counts. If you make enough payments in a year, or are credited with enough, or even get a full year’s worth of payments and credits, then that year gets clocked up as one of your qualifying years. That’s why it’s really important that people who have just missed out on getting enough payments or credits in to get a qualifying year on the scoreboard need to check up to see if they are still allowed to make up the extra by paying Class 3 National Insurance Contributions (currently £6.95 a week). If they can (and there are all sorts of rules and regulations about whether they can or can’t) many people find that for a small additional NI payment they can get hold of a valuable qualifying year to top-up their BSP.
Needless to say, the rules for women are different than for men and, also not surprisingly, some women have different rules to other women, and some even the same rules as men. This is because men have only one State Pension Age (65), whereas women now have sixty one of them depending on when they were born (some women retire at age 60 and some now retire at age 65, and those born between 6 April 1950 and 5 April 1955 retire at all points in between; some at 60 and one month, some at 60 and two months etc etc. All very fiddly). The number of qualifying years women need to chalk up also varies depending on when they were born, with those born before 6 April 1950 only needing 39 out of a maximum of 44 (age 16 to age 60), but those born after 5 April 1955 needing to get 44 out of a maximum of 49 just like men. Women born in between will obviously need to get in touch with someone like Albert Einstein to work out where that leaves them!
Fortunately, most people in the UK understand all this. If they didn’t, it would obviously be very difficult for them to get to grips with planning their retirement income and their pension savings plans. Particularly as all this stuff interacts with means-tested benefits such as the Minimum Income Guarantee and its replacement, the Pension Credit, which is what I was writing my other BeeLine about.
For people who don’t make the lifetime target and fall short of the number of qualifying years required for a full Basic State Pension, all is not lost. What happens is you get a proportionate amount of BSP based on the number of qualifying years you did manage to achieve. So a man who needed to clock up 44 qualifying years, but only managed to get 33, for example, would be entitled to three quarters of the BSP at SPA (£58.08 a week instead of £77.45 in 2003/4). There is a bottom line to this, though, and anyone who doesn’t get at least 25% of the qualifying years they need for a full BSP gets nothing. As an example, a man only getting eight qualifying years under his belt, would get a pat on the back for having a go, you know nice of him to turn up, that sort of thing, but no Basic State Pension at the end of it. It’s not considered a serious attempt.
There are also special rules that were introduced in 1978, called Home Responsibilities Protection (HRP). What happens here is that whole tax years where people are caring for children (up to the age of 16) or for an older or disabled person can be knocked off of the target number of qualifying years required to get a full BSP. (The same would apply to a carer who did do some work but their earnings for that tax year were not enough to make it a qualifying year.) So, as an example, a woman who needed to get 39 qualifying years to gain the full BSP, but took 15 whole tax years out until her child was aged 16, would be able to reduce her target number of years from 39 to 24. It’s not possible to get a full record while claiming HRP, though, as the number of qualifying years for a full BSP can’t be reduced below 20 (or in fact 22 from 2020, but that’s a bridge too far at the moment). So, anyway, they’ve thought of that one, but nice try.
There’s another special option (that’s been available to women only), and that’s been all over the news lately. You’ve guessed it, the now infamous so-called Married Women’s reduced rate contribution. This was a throwback to the early days when the National Insurance system was set up in 1948. In those days there was a special NI contribution for married women that was called the small stamp, or something like that. The idea was that women wouldn’t need a pension in their own right if they were married, so why contribute for one? Well, times have changed and the reduced rate has been being phased out since 1977, but some women still retain the right to pay it. The upside is that those retaining the right to pay the reduced rate pay lower NI Contributions, obviously, but the downside is they earn no qualifying years while they’re paying it and no HRP credit is earned either. Fine if you knew all that, weighed up the pros and cons and decided to do it anyway. Not so good if you just drifted into it without really knowing what was going on and end up with no BSP because of it. That’s why the newspapers have got hold of it as an issue. But it’s worth remembering that a woman in this position could still be able to get a pension based on her husband’s contributions when they both reach State Pension Age. (She may be entitled to a pension of 60% of her husband’s entitlement based on his contribution record.)
Now, and to digress a bit, the Basic State Pension is increased these days in line with increases in the Retail Prices Index (RPI), or 2.5%, whichever is the greater (that’s the current guarantee for the lifetime of this parliament, anyway). This wasn’t always the case, and in real terms the value of the BSP has been declining over recent years. It is programmed to effectively be worth less and less in real terms as time goes on and is likely to be quite literally worthless eventually.
The history of all this is interesting. In the good old days the BSP was increased on an ad-hoc basis broadly in line with increases in National Average Earnings (NAE), but this all started to change in 1974 when the link was to the higher of NAE or the Retail Prices Index (RPI). In 1980 the switch was made to RPI only, and although that means the level of the pension goes up each year so people feel comfortable about it, in reality it means that the BSP continually falls further behind the real level of average earnings. This is a bit of a choker really with the level of the BSP having reduced from 27% of NAE in 1974 to just 16% of NAE in 2002*. It means the UK Basic State Pension is affordable in the long term, with it remaining static at a cost of just 5% of Gross Domestic Product (GDP)**, but that’s really only because it ain’t going to be a very generous pension for people to look forward to.
Well, there you have it. I’ll leave it at that. An interesting topic, but a bit on the depressing side at the same time. I’ve enjoyed putting it all down on paper so much though that, when I’ve got my strength back, I might even have a go at doing one on SERPS or even S2P. Now there’s a challenge.....
Steve Bee
30 April 2003
Source
*Pensions Policy Institute - estimate from Department for Work and Pensions (DWP) (2001) Abstract of Statistics 2000 Section 5 - Rates of Benefit www.dwp.gov.uk/asd/Abstract2001.pdf
**Pensions Policy Institute - The Pensions Landscape published in February 2003.
The information provided is based on Scottish Life’s current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
