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New state pension and contracted-out NICs

Newsletter issue - July 2017.

Most people will be aware that the state retirement pension system has changed for people who reach state pension age on or after 6 April 2016 - that is men born after 5 April 1951 and women born after 5 April 1953. The full new state pension is currently £159.55 per week, but the amount that employees who have previously paid National Insurance contributions (NIC) at the contracted-out rate may be affected under the new system. The introduction of the new state pension from 6 April 2016 brought an end to the contracting-out rules.

In very broad terms, to qualify for the minimum amount of state pension an individual needs 10 years of NIC contributions. 35 years or contributions or credits will be needed to qualify for the full amount.

For those people who were already in the workforce at April 2016, transitional arrangements were put in place which means that everyone will be assessed for a 'starting amount' under the new system. Using the number of qualifying years on the individual's National Insurance record as at 5 April 2016, their 'starting amount' will be the higher of either:

  • the amount they would get under the old state pension, or
  • the amount they would get if the new state pension had been in place at the start of their working life.

Both amounts will reflect any periods when they have been contracted out of the additional state pension.

The rules governing contracting out and new state pension are complex, but broadly, if an individual has a 'starting amount' of less than the full amount of new state pension, then for each 'qualifying year', a certain amount is added to their National Insurance record after 5 April 2016. This equates to around £4.56 a week, (£159.55/35). This amount will be added to the person's 'starting amount', until they reach the full amount of the new state pension, or they reach state pension age, whichever happens first.

For some people it is possible to have a starting amount higher than the full new state pension if they have some 'additional' state pension. The difference between the full new state pension and their 'starting amount' is called a 'protected payment'. Those who have a 'starting amount' which is equal to the full new state pension will get the full new state pension when they reach state pension age. Before the new state pension was introduced, state retirement pension was made of two parts, namely:

  • basic state pension, and
  • additional state pension, often referred to as state second pension or SERPS (State Earnings-Related Pension Scheme).

If an individual was in what is known as a defined benefit company pension scheme - where what they are paid in retirement is related to salary - they are likely to have been 'contracted out' of the additional state pension. This means that they would have paid a lower rate of NICs and will have earned replacement pension benefits in an employer scheme or a personal pension.

Despite having what they thought were 35 years of qualifying years, they will not necessarily get the full amount of new state pension - although entitlement can be improved by paying contributions after 5 April 2016. The Government has advised that while someone in this situation will get less than the full amount, retirees will still be paid at least what they would have got under the old state pension.

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