Pensions: How the state pension works

The state pension is a small, regular payment provided by the government that most people can claim when they reach state pension age, currently in the mid 60s, but gradually rising as we all live longer. It is based on your record of national insurance contributions, not on your earnings, and is separate from any workplace or private pensions. 

You pay national insurance contributions while you’re working, when you earn over a certain amount. Non-earners receiving certain benefits may also receive national insurance credits in certain circumstances, such as when you were a carer for young children or older relatives. You need at least ten qualifying years of national insurance contributions to receive anything, and 35 qualifying years to receive the full amount. The state pension usually rises each year, so offers some protection against rising costs.  

You can get a state pension forecast at the gov.uk website. You’ll need to sign in to use this service and may need to prove your identity using a photo ID, like a passport or driving licence. However, the state pension age is regularly reviewed, so the results of this tool may change in the future. Government policy on pensions is based on factors such as life expectancy and the available budget to pay for state pensions out of general taxation.

Unlike workplace or private pensions, there isn’t a specific pot of money set aside for the UK state pension. Current workers’ national insurance contributions and taxes fund the pensions of current retirees, so there are no guarantees that you will be paid a certain amount at a specific age when you come to retire.

When receiving your state pension, it’s paid without any tax being deducted first. But depending on your total income from state pension and other sources, you may have to pay income tax. The state pension age has risen over time. It changed to 66 for both men and women between December 2018 and December 2020. There are planned rises for state pension age, but it will remain under 70 for the foreseeable future. However, the exact timing depends on changes to life expectancy and will be confirmed by government reviews. It’s possible that if you’re under 40, then in the future there might be further rises to state pension age too.

To recap, the state pension is based on your national insurance contributions. If you’re employed, this will be automatically deducted from your salary. If you’d like to know where you stand, check your forecast online at the gov.uk website. Even though there will be changes to the age when you can receive your state pension, it is likely to remain an important part of retirement income for most people. Understanding your state pension now can help you plan with confidence for the future.

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