The Basic State Pension

Individuals who are employed or self-employed (and those who have been credited with National Insurance Contributions (NICs)) are entitled to the basic State pension upon reaching the State pension age (SPA).

The basic State pension pays a flat rate amount. The full entitlement is paid if the individual has made, or has been credited with, full NICs for at least 90% of their working life. A working life is currently:

49 years for a man or woman born on or after 6 October 1954.
44 years for a woman born before 6 October 1950.
Between 44 and 49 years for a woman born between 6 October 1950 and 5 October 1954 (see table for changing SPA for women).

An individual’s working life is calculated from the start of the tax year in which they reach 16, to the end of the tax year prior to the one in which SPA is reached.

The full basic State pension is £97.65 per week for the current tax year (2010/11).

Married couples are entitled to an additional £58.50 per couple per week for the current tax year (2010/11). This gives a total of £156.15 per week. This is dependent upon the husband’s NIC record being adequate and the wife’s earnings being below a Department for Work and Pensions (DWP) minimum.

This entitlement increases if:

The wife has made sufficient NICs to give her a basic State pension of above £58.50 per week in her own right.
This higher amount is then paid instead of the additional entitlement, to a maximum of a further £97.65 per week.

If a wife was claiming dependent husband’s allowance on top of unemployment or incapacity benefits before she retired and her husband has no basic State pension, she can claim the extra £58.50 per week for her husband.

Once in payment, the basic State pension increases at the beginning of each tax year in line with increases in the Retail Price Index (RPI). The increase in the RPI is measured over the twelve months up to the previous September.

If you are living abroad when State Pension amounts go up, you may not get the increase, unless you live in:

A country that belongs to the European Economic Area or Switzerland.
A country that has an agreement with the UK to allow these increases.

These other basic State benefits are also available:

An unindexed Christmas bonus of £10.
An unindexed increase of 25p a week from age 80.
£125-£400 (depending on circumstances) per pensioner household per year towards heating bills.
A further £100 per year for households with a pensioner aged 80 or over.
Pensioners with a child or children, for whom they claim Child Benefit, are entitled to £20.30 per week for the first child and £13.40 for each additional child.

Changes to the basic State pension

The Pensions Bill 2006 includes changes in respect of the basic State pension. These changes will affect those reaching SPA on or after 6 April 2010 and can be summarised as follows:

The number of years of qualifying years needed to get a full basic State pension will be reduced to 30 years for men and women.
The current minimum contribution conditions will be removed. An individual will no longer have to have at least one qualifying year where they have paid (or are treated as having paid) NICs.
An individual will no longer need to have 25% of the qualifying years needed for a full basic State pension to get any basic State pension.

An individual will need at least one qualifying year of either paid or credited contributions to give some basic State pension. Each qualifying year of paid and credited contributions will be worth 1/30 of the full basic State pension. One qualifying year of paid or credited contributions will give 1/30 of the full basic State pension, 15 qualifying years will give a basic State pension of half of the full basic State Pension, and so on.

The basic State pension is to be increased in line with average earnings at some point in the future. According to The Pension Service, part of the DWP, this will happen by the end of the next Parliament at the latest.

Basic State Widow(er)’s death and bereavement benefits

The equivalent of the basic State pension (up to £97.65 per week for the current tax (2010/11)) is paid to a widowed mother from the date of bereavement until one of the following occurs:

The youngest child reaches the age of 19.
All children over the age of 16 have left home.
The mother remarries.

This called the widowed parent’s allowance.

In addition, a widow over the age of 45 can receive up to £97.65 per week (for the current tax year (2010/11)) from the date of bereavement or the widowed parent’s allowance ceases, until one of the following occurs:

The widow reaches age 65.
The widow claims her State pension.
The widow remarries.

This called the bereavement allowance.

The widow or widower of a spouse who has paid NICs is entitled to a tax-free lump sum of £2,000, provided he or she is not living with another individual of the opposite sex as man and wife. This lump sum will be paid if the widow is under the age of 60 or the widower is under the age of 65.

This is known as the bereavement payment.

Tax treatment of the basic State pension

The basic State pension is taxable as earned income. Any tax payable from the basic State pension is never deducted directly (i.e. the basic State pension does not constitute net relevant earnings).

When calculating the amount of tax liability, the State pension benefit is added to any other income. Therefore there will be a tax liability if total income, including the basic State pension, exceeds the personal allowance.

The tax liability is paid from the other income, not from the basic State pension.

The tax treatment of a married man who is claiming the extra £58.50 for his wife is more complicated:

If the wife is not yet 60, the extra income is known as the adult dependency addition. It is treated as part of the husband’s income for tax assessment purposes.
If the wife is over 60, the income is known as a Category B pension. It is therefore treated as part of the wife’s income for tax assessment purposes, whether she is working or not.

For more information, please contact us.