Thursday 5 October 2023

TARGET 203 - BOOST YOUR NEW STATE PENSION

UPDATED for the 2023/24 tax year. All rates are those paid from 10 April 2023.


More than a million people who reach state pension age in the years from 6 April 2016 will not get the full amount of the new ‘flat-rate’ state pension - currently £203.85 from 10 April 2023.

But many of them could boost their pension towards or up to the full flat rate amount.

This guide is for men born 6 April 1953 or later and women born 6 October 1953 or later who paid into a good pension at work or, in some cases, into a personal pension.

It is complicated - don't blame me I didn't invent the rules! But please persist, as it could make you better off for the whole of your retirement.  

There are other groups who may not get the full new state pension because they have paid less than 35 years of National Insurance contributions. They may be able to boost their state pension by paying extra contributions now. This piece does not cover that issue. Try the links at the end.

NEW STATE PENSION
The new state pension was supposed to be simple. A flat-rate amount for everyone who had at least 35 years of National Insurance contributions. This year 2023/24 that amount is £203.85 week (£10,600.20 a year) and is taxable. However, there are around one and a half million people who will reach pension age in the years before 2027 who will get less than that even if they have 35 years or more National Insurance contributions.

That is because an amount is deducted from the new state pension for every year they paid into a good pension at work. I call it a contracted out deduction because they were ‘contracted out’ of part of the state pension called SERPS or State Second Pension (S2P). They paid lower National Insurance contributions and instead of that additional state pension they get a pension from their job which was supposed to replace it. The Government prefers to call it 'Contracted Out Pension Equivalent' or COPE. It is that COPE amount that is deducted from your new state pension.

This group includes most people who worked in the public sector, such as
  • nurses, doctors, and others in the NHS
  • teachers in schools and universities
  • police officers and fire brigade staff
  • civil servants
  • local government workers
  • armed forces
  • Post Office workers
It also includes many people who worked for one of the privatised industries such as British Airways, British Rail, British Steel, and Royal Mail.

Another large group affected are people who worked for a private sector employer who paid into a good scheme at work that promised them a pension related to their salary. They used to be called ‘final salary’ schemes and nowadays are called Defined Benefit or DB schemes. In the past many large firms ran such schemes. There are still more than 5000 of them and if you paid into one at any time from 1978 your new state pension will be reduced.

Also included are some people who paid into a personal pension and who were persuaded to contract out of part of the state scheme – at the time it was normally called ‘contracting out of SERPS’.

For all these people their new state pension will be reduced for the years they paid into a contracted out pension scheme. That deduction applies even if they have paid the 35 years which is needed to get a full pension – the deduction is made after the full pension is worked out. It can also apply even if they were contracted out for a short period and paid in 35 years or more when they were not contracted out. These deductions can be very large but normally can never leave you with less than £156.20 a week of the old or 'basic' state pension.

Please do not ask me why that is fair! It may not be fair, but it is the law. The good news is that you can reduce that deduction and, depending on your age and the amount deducted, you may be able to boost your pension up to the full flat-rate £203.85.

THE DEDUCTION
If your new state pension has an amount deducted from it because you spent some time paying into a good pension scheme at work then you can reduce that deduction or even wipe it out. It will help even if you already have 35 years of National Insurance contributions or more.

If your new state pension is reduced because you paid into a good pension scheme at work then every year of National Insurance contributions you pay from 2016/17 to the year before the tax year in which you reach state pension age - now 66 for everyone - will mean that deduction is less.

If you work and earn more than £123 a week you will get contributions credited or paid to your account (you start actually paying for them when you earn above £242; under that they are credited). If you get child benefit for a child who is less than 12 years old then you will also get a credit for each week. If you get universal credit, jobseeker’s allowance, employment and support allowance, or working tax credit then you will get a credit for each week you get that benefit. You can also get credits if you are a carer in some circumstances. Check here for more details of who can get credits. Some are given automatically, others have to be claimed.

Men can get credits for years between women’s state pension age and 65. They get a credit for the tax year in which they reach women's state pension age (unless they also reach 65 in that tax year) and any subsequent tax year before the tax year they reach 65. So these man credits are only available to men born before 6 October 1953. See footnote.

If you are self-employed then in 2023/24 you must pay what are called Class 2 National Insurance contributions if your profits are £12,570 or more. They are called Class 2 and are £3.45 a week (£179.40 a year). If your profits are between £6725 and £12,750 you will be given a credit. If your profits are up to £6724 you can pay these contributions voluntarily - but only for years in which the were genuinely self-employed. In previous years there were no credits paid and the threshold for paying was just below £6725 a year. 

If you will not pay National Insurance contributions at work or as self-employed or get credits for them then you can pay voluntary contributions, called ‘Class 3’. They will cost you £17.45 a week (£907.40 for a year). For each extra year of contributions your pension will be boosted by £5.82 a week (£302.86 a year) so the payback is rapid – three years for non-taxpayers; less than four if you pay basic rate tax; five for higher rate taxpayers, and less than five and a half for top rate 45% taxpayers. Contributions for earlier years are less: 2022/23 - £824.20; 2021/22 - £800.80; making them even better value for money. If you pay in this year 2023/24 you can only pay the lower rates for two previous tax years. Contributions for 2020/21 and earlier will be at today's rate of £907.40. [For reference earlier rates were 2020/21 - £795.60, 2019/20 - £780.00; 2018/19 - £772, 2017/18 - £740, and 2016/17 - £733.20 but you can no longer pay at these rates.]

The new state pension was increased to £203.85 a week from 10 April 2023 rising according to the triple lock of earnings, prices, or 2.5%. Prices rose the most so the pension rose by inflation measured by the CPI (the previous September) which was 10.1% 

If you have paid some contributions at work or as self-employed during the tax year but you are short of a full year you can pay individual weeks through Class 3 (or Class 2) to make your record up to a full year.

You can only pay Class 3 contributions for the years before the tax year in which you reach state pension age. That limits the number of years you can pay to boost your pension. The table show which years you can pay Class 3 contributions to set against the contracted out deduction and the maximum boost that should give to your pension. Your pension cannot be boosted to more than £203.85 a week and it will not ever be reduced to less than £156.20 so the maximum boost is £47.65. Paying the ninth year may not be worth it for £1 a week boost.



BOOSTING A NEW STATE PENSION THAT IS SUBJECT TO A CONTRACTED OUT PENSION EQUIVALENT (COPE) DEDUCTION

Reach State Pension Age in

Men born

Women born

Years you can pay

Maximum pension boost (2023/24 rates)

2016/17 or 2017/18

6 April 1951

5 April 1953

6 April 1953

5 Oct 1953

0

£0.00

2018/19

6 April 1953

5 Jan 1954

6 Oct 1953

5 Jan 1954

1

£5.82

Men and women born

2019/20

from 6 January 1954

to 5 July 1954

2

£11.65

2020/21

from 6 July 1954

to 5 April 1955

3

£17.47

2021/22

from 6 April 1955

to 5 April 1956

4

£23.30

2022/23

from 6 April 1956

to 5 April 1957

5

£29.12

2023/24

from 6 April 1957

to 5 April 1958

6

£34.95

2024/25

from 6 April 1958

to 5 April 1959

7

£40.77

2025/26

from 6 April 1959

to 5 April 1960

8

£46.59

2026/27

From 6 April 1960

To 5 April 1961

9

£47.65 (max)


NEXT STEPS
You can pay voluntary Class 3 contributions in the tax year they are due or up to six tax years after that. So you can still pay for the 2017/18 tax year until the end of this tax year, 2023/24. So you should act quite soon if you want to payfor that tax year. You cannot pay them in advance so make a note to pay future years in April. However, the price will almost certainly rise as time passes so it will usually be cheaper to pay them as soon as you can.

If you will reach state pension age in 2023/24 you may want to act soon to see if you can boost your pension by paying National Insurance contributions for the six years 2017/18, 2018/19, 2019/20, 2020/21, 2021/22, 2022/23. That could give you an extra £34.95 a week on your pension.

You can phone the DWP’s Future Pension Centre on 0800 731 0175 and ask for help or advice about paying extra contributions. Have your National Insurance number with you. Ask what your ‘starting amount’ is and ask if there is a deduction for being contracted out. If your starting amount is less than £203.85 and there is a contracted out deduction then you may be able to boost it using the information in this guide. 'Starting amount' is explained in the notes below. If you have a deduction for a pension which you cannot trace use the Government's free Pension Tracing Service.

In the past, many people have contacted the DWP and been told they cannot boost their pension because they already have 35 years or more of contributions. That is incorrect. Some officials seem to be confusing this scheme with one to fill gaps in your contribution record. Others have been told that they need more than 35 years to get a full pension. That can be true in the circumstances in this blogpost, but it is a confusing way to put it. 

You may get more sense from the free and excellent Money Helper website or call on 0800 011 3797. Beware of similar sounding commercial organisations.

You can check your starting amount at this Government website. You will have to go through security procedures which can be a pain. Make sure it includes your 2015/16 contributions. This website may let you see how you can boost your pension by paying extra National Insurance contributions. 

NOTES
1. All the rates in this guide are correct in 2023/24. 

2. If your income is low then you may get extra money from pension credit or help with your council tax or rent (rent or rates in Northern Ireland). If you buy Class 3 contributions to boost your pension those benefits will be reduced but it will almost always still be worthwhile.

3. Your ‘starting amount’ is the calculation of how much state pension you have built up at 6 April 2016 under the old and the new rules. Your starting amount is the one that is bigger. It will take account of National Insurance contributions paid up to 2015/16 and will also make a deduction for years you have been ‘contracted out’ of part of the state pension system called SERPS. If it shows you have fewer than 35 years of National Insurance contributions then sadly iy id now too late to pay more to boost that number towards 35. 

4. SERPS, the State Earnings Related Pension Scheme, was an earnings-related supplement to the basic state pension. People paid into it as part of their National Insurance contributions from April 1978 to April 2016. From April 2002 it was changed and renamed State Second Pension (S2P). It was SERPS and S2P – officially called ‘additional pension’ – which people ‘contracted out’ of if they paid into a good pension at work or in some cases into a personal pension which they chose to ‘contract out’. They paid lower National Insurance contributions. The pension they paid into was supposed to replace the SERPS or S2P but it does not always do so in full. If it shows that you have fewer than 35 years of National Insurance Contributions then you may be able to pay to fill gaps right back to 2006/07 to boost that number towards 35. 

5. Tax years run from 6 April one year to 5 April the next. So 2023/24 runs from 6 April 2023 to 5 April 2024.

6. If you have an old company or personal pension you cannot trace, use the Government's free Pension Tracing Service.

7. Contacted Out Pension Equivalent is the amount deducted from your new state pension to take account of the time you were contracted out of SERPS/S2P. In theory the amount deducted should be paid to you by the pension scheme you paid into as part of being contracted out. But that will not always happen especially if you were contracted out into a personal pension. This government guide to contracting out sort of explains it.

8. Man credits. These man credits - called auto-credits - are only awarded for whole tax years, not individual weeks. Men born 6 April 1952 to 5 April 1953 can get a year of contributions credited for 2016/17. They may also get earlier years credit but they do not help with reducing their contracted out deduction. Men born 6 April 1953 to 5 October 1953 can get a year credited for 2017/18.

Men born 6 October 1953 or later cannot get them.

BOOST YOUR PENSION GUIDES FOR OTHER GROUPS
Men born 6 April 1951 or later and women born 6 April 1953 or later.
·         Filling gaps in your National Insurance record – new state pension 

Men born before 6 April 1951 and women born before 6 April 1953
·        It is now too late for you to fill any gaps in your National Insurance record – old state pension 
·        
There is also a comprehensive guide to what you can do to top up your state pension available as a download from the mutual insurance company Royal London written by former Pensions Minister Steve Webb. It is a little out of date now but is well worth a couple of hours study.

Version: 6.0
5 October 2023
Previously: Target 155, Target 164, Target 169, Target 175, Target 179, Target 185
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