Fergus Muirhead looks at the basic state pension
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
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I've been getting lots of different questions from you on the subject of pensions, including issues surrounding the state pension, personal pensions and occupational pensions.
Pensions are seen as a hugely complicated area of money, and hugely emotional since, for most of us, the income we receive from our pensions will be needed to keep us going for a very long time, hopefully, after we give up work.
It's really important, therefore, that we understand ho w pension work and how we can use them effectively to produce the income we need at retirement.
This is the first in an occasional series of articles looking at different aspects of pensions that have featured heavily in your emails to me over the last 12 months.
I'm going to do it without jargon, and without making it unnecessarily complicated and complex. We'll look at state pensions, defined benefit and defined contribution pensions, personal pensions and self-invested personal pensions. And we'll look at how you can take an income from a pension using an annuity or drawdown.
And I promise that's the last you'll hear of some of these terms! Part of the problem we have with understanding pensions is that the language used is so boring that we want to shut our eyes as soon as we start to read about it.
I'll keep it simple and explain any technical terms in easy-to-understand language.
And we're going to start with the state pension, and more importantly the 'basic' state pension. For some reason people associate the word 'basic' with 'universal' and assume that everyone is entitled to the full-rate basic state pension when they achieve whatever retirement age is relevant for them to be entitled to payment.
But that's simply not the case. Entitlement to the full basic state pension, currently £107.45 a week, is dependent on having an adequate National Insurance contribution record while you were working. For most people 'adequate' is defined as having paid NI for 30 years, and so effectively every year is worth, at current rates, a little over £3 per week.
Now, that doesn't mean that you actually have to have 'worked' for 30 years. Some people who can't work because they look after young children or sick or elderly relatives will qualify for 'credit for parents and carers' meaning that NI contributions will be applied for years that they didn't work because they were doing other things that qualified.
But that credit may not happen automatically and you would be wise to check with www.directgov.org.uk to find out what level of Basic State Pension you will be entitled to when you retire.
So the important thing to note about the state pension is that it's not an automatic right to have to full pension paid to you at retirement age. You have to have enough National Insurance contributions, or credits to make sure that you'll get the full pension. If you're not sure whether you have or not then you need to check. It may be possible to buy back years on National Insurance that you have missed but again you need to do this by checking out your current entitlement.
But of course, once you know how much you are entitled to you need to know when you're going to able to start drawing it I suppose. In the past it has been very easy. Men got their pensions at 65 and women go theirs at 60. But now it's all changed. Firstly, pension ages are being 'equalised' over the next few years so that in time men and women will all get their pensions at the age of 66. If you're female and not yet retired then the age at which you get your pension is a complex area and one that I'm not going to go into in detail here, except to say that is you go to www.gov.uk there is a calculator there that will allow you to input your date of birth and that will then tell you when you can expect to receive your basic state pension, assuming you have done the work in the paragraph above and worked out how much of a pension you are going to get.
But that's not the end of it. Once pension ages have been equalised at 66 they are going to rise, firstly to 67 then to 68 and who knows where after that! The government has said that it intends to raise the pension age if life expectancy keeps increasing, so the sky could be the limit in theory! I did read somewhere last week that if you are 17 now and life expectancy rises the way it has been in the last 20 years for the next 20 years, then you might get your pension at 77!
Now, the lesson to be taken from all of this is that it's no good leaving it until you're 59 to find out what sort of pension you can expect when you retire. You need to start looking at these issues now, and that means starting to look at the level of pension you can expect from the government, and when you can expect to receive it.
If you have actually retired, then there may not be a lot you can do to make sure you're getting the best pension from the government that you can, but there may be other benefits that you should be claiming if you're not receiving the full pension, so it's still important to understand how all of this works, and next time we'll tie-up the state pension part of this by having a look at what other benefits are available from the government in addition to the basic state pension.