What do you think of when you hear the word ‘pension’?
The Oxford Dictionary describes a pension as:
“…a regular payment made by the state to people of or above the official retirement age and to some widows and disabled people”
In the UK, this is referring to ‘state’ pension. In the US it’s called “social security”. In any case, this ‘regular payment’ is very small amount you are paid when you are old is just about enough to eat and keep the lights on, but not much above that. However it’s an important piece of the pension puzzle so you should at least know the basics.
Does Everyone Get a Pension?
As with most things tax-related, it depends.
The state pension is funded by national insurance contributions, the ‘tax’ you pay the state for all social services if you are earning £95 or more a week (in 2009/10). In the UK this includes your pension and the national health service. The amount of your pension is therefore linked to the number of years you have been paying National insurance contributions.
Note: if you’re a small business earning a profit of less than £5075 you don’t ‘have’ to pay national insurance contributions but it’s worth considering doing so if you are short of years to fully qualify for a state pension- see below).
If you haven’t retired yet you are nearer to qualifying for a state pension than anyone else has ever been at your age. The old rules said you had to make contributions for 44 of the 49 years between the ages of 16-65 to receive a full state pension.
This has now been cut significantly after The UK Pensions Act 2007 which reduced the number of qualifying years needed for a full basic State Pension to 30 for people who reach State Pension age on or after 6 April 2010.
Even better if you fall short of the 30 years of contributions you can ‘buy’ extra years to make sure you qualify for the full monthly payment. You can also still receive a full pension even if you’re out of work for some of those years -as part of any unemployment or disability benefit your national insurance contributions are paid, so from a state pension perspective it’s like you were never unemployed.
You can also have your National Insurance contributions paid if you’re a full time carer so have other special circumstances so if you are not paying National insurance for any reason make sure you’re not missing out by visiting the UK government’s website: direct.gov.uk.
If you pay less than 30 years worth of National insurance you still get a partial pension depending on the number of years but there is a risk you may qualify for nothing at all if you pay less than 10 years of contributions.
Is a Basic Pension enough?
Knowing about Magical Penny and my enthusiasm for getting your long-term finances sorted, a friend joked to me that a state pension didn’t seem that bad. At least I hope he was joking -if you have minimal needs then perhaps he’s right. It is possible live on the state pension -millions do, but even the government says the state pension has its limitations on the direct.gov.uk website:
“It can give you a reliable foundation for your income in retirement, although it might not be enough to support the lifestyle you want.”
In 2010-11, a single person can get a maximum of £97.65 a week basic State Pension (£152.40 for a married couple). Seem a bit small? Even the government recognises this -if this is your only income you can have your pension topped up with a ‘pension credit’ to a total of £130.00 a week (198.45 for couples).
The Oxford Dictionary might have been right about its definition of a pension as a ‘regular payment’ but its not as simple as that. The basic state pension is really helpful at almost guaranteeing you an income when you reach your advancing years yet, as this article has shown, tax rules are always changing and can be difficult to follow.
One thing is for sure though: Relying on a state pension will limit your lifestyle options.
Thankfully it’s never been easier to become empowered about saving for the long-term and Magical Penny will show you how in future articles in this Pension series.
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