How to improve your state pension

State pension - new and old

You’re probably aware that the “new state pension” (NSP) replaced the “basic state pension” (BSP) in April 2016. The NSP is paid at a flat rate depending on the number of years’ NI contributions on your record; 35 years gives you the maximum. The BSP also depends on your NI record; 30 years gave you the maximum plus an earnings-related element, known as the state second pension (usually referred to as S2P) previously known as the state earnings related pension. However, if you paid NI contributions before April 2016 the switch from the BSP to the NSP isn’t a simple swap.

Pension rights compared

Ultimately your state pension entitlement is decided by the DWP. It compares your NSP pension amount with you would get if the BSP rules had continued. You’re most likely to benefit from a higher BSP plus S2P if you’ve been self-employed or contracted out of S2P (contracting out meant that some of your NI contributions were paid into a private pension of your choice instead of adding to your S2P fund).

Crunching the pension numbers

The calculation the DWP makes involves three main elements: (1) the number of full years’ NI on your record; (2) the amount of S2P you paid; and (3) the number of years you were contracted out of S2P. The calculation takes 1/35th of the maximum NSP (currently £230.25 per week) for every year of NI credits you have, then adds the value of your S2P and deducts an estimate of the private pension you’ve built up by contracting out. If the result is more than the NSP amount, you’ll get the BSP plus your S2P, otherwise you get the NSP.

The example below uses current rates of NSP and BSP and the current maximum NI years (35).

Example. Del is 53 and has 30 years of NI credits on record. He was self-employed up to and including 2016. Because he’s paid 30 full years’ NI he qualifies for the full BSP of £176.45 per week. The DWP comparison with the NSP produces a lower figure and so Del will only receive the £176.45 based on his current NI record. However, he can increase his state pension entitlement by £6.57 per week (£230.25/35) for each extra year of NI contributions he pays until the new maximum NSP of £230.25 is reached. That will take Del another nine years, i.e. four years beyond the apparent 35-year limit.

Beyond 35 years

Even if you’ve worked 35 years it might be possible to increase your state pension entitlement by continuing to pay NI contributions. You can do this either by earning or paying voluntarily. At current rates an extra year of contributions adds £231 to your pension entitlement.

Check if it’s worth paying NI contributions beyond 35 years through your HMRC online account, or if you don’t have one by completing Form BR19.