The UK’s state pension is one of the most treasured benefits out there. It may not be enough to provide you with a comfortable retirement on its own, but it is an important foundation for your pension income, guaranteed to rise every year and not something you can lose in falling investment markets or see eaten up in high charges, as you could with a private pension.
But it is notoriously complex.
The principles are simple enough. Build up a decade’s worth of National Insurance contributions, and you get at least some state pension. Get up to 35 years’ worth, and you get the full whack, currently £155.95 a week.
Or do you? If you’ve had a period when you’ve been “contracted out” of part of the state pension – that is paid lower National Insurance in order to get, theoretically, a higher private pension – then a complex calculation will be applied to your weekly amount to reflect this. You’ll encounter terms such as “contracted out deduction”, “guaranteed minimum pension” or “contracted out payment equivalent” applied to your weekly amount, making it challenging to know what you’ll truly get.
That’s not all. You build up National Insurance contributions through employment – either paying them directly from your monthly salary, or through a tax return if you’re self-employed.
But what about when you’re not working, say, to have a baby or take care of someone? The good news is that often this can qualify for National Insurance credits, which help fill the gaps left by taking time off work. But for a certain group of carers, who aren’t currently getting National Insurance credits, there’s something of a crisis brewing.
Introduced in 2010 by the Government, Carers Credit was designed to help carers who spend 20 to 35 hours a week caring for someone, filling in the gaps on their National Insurance record.
This was a particularly sore issue, as this group did not spend the full 35 hours of caring per week required to qualify for carer’s allowance, which would automatically trigger National Insurance credits.
Back in 2010, the Government reckoned this would help an additional 160,000 carers but an estimated 140,000 carers in the UK are failing to claim. A Freedom of Information request carried out by pensions company Royal London, found that just over 3,500 people claimed in the last tax year. This year, the figure sits at around 2,700. The Government told Which? that the number of applications for Carer’s Credit has consistently increased year-on-year since 2010 and that, as of October last year, 13,700 carers were in receipt of the credit.
But that still represents a huge shortfall – suggesting that 93 per cent of people potentially eligible for this valuable benefit have yet to claim.
Why is this so important? You could be missing out on thousands of pounds’ worth of income in retirement if you have less than the maximum required National Insurance contributions. The state pension is reduced in proportion to the number of years’ worth of contributions you have.So, if you only have 30 years’ worth of contributions, you’ll only get 30/35ths of the state pension – equivalent to £133.67 a week. That’s a loss of £22 a week, or £1,144 a year. Over a 20-year retirement (and not considering future rises in the weekly amount), that’s more than £22,000 lost.
If this affects you, or someone you know, take action now. To qualify for Carer’s Credit, you must be between 16 and state pension age and provide at least 20 hours of care per week for a disabled person who is receiving one of a number of disability benefits – the Government lists these out on gov.uk. And even if the person being cared for isn’t claiming benefits, you can get a GP or social care professional to confirm their details on your application form. You can download an application form from gov.uk/carers-credit or call 0800 731 0297 to get more information.
The state pension is a vital part of your financial future in retirement. You do not get penalised for making the emotionally challenging sacrifice of giving up work to care for someone in need, so make sure you know, and take advantage of, the system that’s in place to give you what you’re entitled to.
Gareth Shaw is head of Which? Money Online