Why you don’t get the full State Pension

Important information: the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Setting the scene

The State Pension sounds like a single, uniform system. In reality, however, there are two versions in operation today.

First up, there is the new State Pension.

• This applies to people who reached State Pension age on or after 6 April 2016. If you are a man, this means you were born on or after 6 April 1951. For women, it means you were born on or after 6 April 1953.
• The full rate pays £241.30 a week, or £12,547.60 a year.

Then, there is the old State Pension.

• You qualify for this if you hit State Pension age before 6 April 2016.
• It is made up of two parts: the basic State Pension and the Additional State Pension.
• The basic State Pension pays £184.90 a week, or £9,614.80 a year.
• There is no fixed amount for the additional State Pension. It is based on your earnings history and how many years you paid national insurance (NI) for.

The new State Pension was introduced to simplify a complicated, two-tier model. For now, however, we remain in a messy transition phase: about 8 million pensioners fall under the old framework and 5 million fall under the new one. And even if you receive the new State Pension, your payments will be affected by decisions you made under the old regime.

Reason 1: you contracted out

One reason why you might receive a lower State Pension than your peers is because you ‘contracted out’ of the Additional State Pension during your working life. (Quick reminder: the Additional State Pension is the extra money you can get on top of your basic State Pension under pre-2016 rules.)

In this scenario you and your employer would have paid lower NI contributions to reflect the fact that you were building up a private pension elsewhere. The decision to contract out means you are now entitled to less money from the government.

• If you receive the old State Pension, the additional element will be low or non-existent for the time you were contracted out. Your basic income of £184.90 a week will be unaffected.
• If you receive the new State Pension, you will receive less than £241.30 a week to reflect your lower NI contributions.

This works both ways, however. If you did not contract out, you could enjoy far more than the basic amount of £184.90 a week. The same logic applies to the new State Pension: if you built up Additional State Pension, you may receive more than the ‘full’ amount of £241.30 a week.

Reason 2: you have gaps in your NI record

The second reason your State Pension is lower than expected could be due to gaps in your NI record.

You need a certain number of ‘qualifying years’ to receive the State Pension, and you build these up by paying NI or by receiving NI credits. Years where you were contracted out count as qualifying years and are not gaps in your NI record. However, if you spent some time abroad or earning very little, you could easily have some holes.

Exactly how many qualifying years you need depends on what system you fall under.

• For the new State Pension, you typically need 10 qualifying years to receive any payments, and roughly 35 qualifying years to receive the full amount. (In some scenarios you may need more).
• For the full basic State Pension, the number of National Insurance qualifying years required depends on your age and gender. It can range from 30 years to 44 years.

What you can do about it

If there are gaps in your NI record, you can top up your State Pension by making voluntary contributions for the past six years. You can do this before or after you reach State Pension age.

The point of making voluntary NI contributions is to pay a small amount now, so you get more State Pension in the long run. This often makes good financial sense, but you have to consider how long it will take you to break even and whether you can afford the upfront cost.

It is also worth exploring whether you have missed out on any NI credits. It recently came to light, for example, that some parents who claimed child benefit have missed out on State Pension payments because of faulty NI records.

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Useful tools

State Pension rules are complicated - and this article only scratches the surface. It does not cover every reason why you might be receiving less than a friend or neighbour.

If you have a specific question or problem, there are some useful tools out there.

If you are not yet at State Pension age, there is a government service that will tell you how much State Pension you could get, when you can get it, and if you can increase it.

• Check your State Pension forecast

If you already receive the State Pension, you can check your NI record online. The tool will flag any gaps and calculate how much it will cost to plug them.

• Check your National Insurance record

There are also free telephone helplines. If you are below State Pension age you can contact the Future Pension Centre for guidance. If you are already at State Pension age you can call the Pension Service.

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