Why some retirees have a state pension of £21,000 a year – almost twice the ‘full’ amount

THOUSANDS of Brits are receiving a State Pension totalling £21,000 a year or more – almost twice the ‘full’ amount. 

The full rate of the new State Pension is £221.20 a week, giving pensioners £11,502 a year.

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But according to the Department for Work and Pensions, around 3% of pensioner households in Britain receive a State Pension amount in excess of £400 a week.

This brings their annual total to at least £20,800 a year – almost twice as much as the full rate of the new State Pension.

Here’s what’s going on – and how you can top up your State Pension.

WHY DO PENSIONERS RECEIVE DIFFERENT STATE PENSIONS?

Pensioners receive different amounts of State Pension because of the complex way the system works, and based on their years of National Insurance contributions.

There are actually two systems, the ‘old’ State Pension and the ‘new’ State Pension. Under both systems, the amount people receive varies.

Most pensioners in the UK are on the old State Pension system because they reached pension age before 6th April 2016, when the new system was introduced.

WHAT IS THE OLD STATE PENSION?

The old system had two main parts – a ‘basic’ pension worth up to £169.50 per week for those with 30 years of National Insurance contributions, and an earnings-related ‘additional’ pension, also known as SERPS.

The basic State Pension is worth up to £8,814 a year, £2,688 less than the full new State Pension.

But the additional pension, or SERPS, can provide retirees with a lot extra.

Steve Webb, former pensions minister and now partner at pension consultants LCP, explains: “Under SERPS the amount received depends on your earnings and whether you were paying in only to the state scheme, or also into what is known as a ‘contracted out’ workplace pension.”

There is no maximum limit on a person’s additional State Pension based on their own National Insurance record and earnings.

Where a person inherits additional State Pension from a deceased spouse or civil partner the overall amount of their additional State Pension is capped at £218.39 per week.

ARE THERE OTHER ADVANTAGES TO THE OLD SYSTEM?

Yes. Under the old system, each year that you delayed taking your State Pension could add an extra 10.4 per cent to your eventual entitlement.

By deferring the basic State Pension for 52 weeks, a whole year, a person could receive £17.62 per week more (equal to 10.4 per cent of £169.50) when they finally took their pension.

This is equivalent to an extra £918.75 for every year of deferral.  

As Webb explains, “the old system rules for deferral were very generous and so someone with an average lifespan would generally end up in profit by deferring”.

“So someone with a full basic pension, very good SERPS (additional pension) and delaying taking their pension could easily get £20,000 a year in state pension”.

CAN I GET HIGHER AMOUNTS UNDER THE NEW STATE PENSION?

Under the new state pension it’s harder to get these very large amounts.

The flat rate of the new state pension is £221.20 per week, but there’s no standard amount on top of this – and deferring only earns you 5.8 per cent per year under the new system.

By deferring for 52 weeks, you’ll get an extra £12.82 a week.

Rachel Vahey, AJ Bell head of public policy, says it’s important to think carefully before deferring.

“Whether this offers a good deal for the individual depends partly on how long they expect to live for,” she points out.

“Very broadly, if someone is in poor health then it may be better to take the state pension, but if they are in good health and think they may live beyond 17 years then it could be worth considering.”

ARE THERE ANY EXCEPTIONS?

The one exception is that people who already had a big pension under the old rules by 2016 – as in a good basic pension plus a large additional (SERPS) pension – can get that figure as their pension, even if this exceeds the new full flat rate.

However, as Webb points out, “that figure is then locked in and post-2016 contributions generally cannot improve it”.

“This means with every passing year, people will have less and less of their working life in the pre-2016 period and therefore less chance to build up a really big pension,” he says.

HOW DO YOU GET A FULL NEW STATE PENSION?

If your National Insurance record started before April 2016, you may have been contracted out – where you or your employer paid more into your workplace or private pension and less into your State Pension.

In cases where you were contracted out, you will usually need more than 35 qualifying years to get the full rate of new State Pension.

Those who did contract out would have benefited from a private pension, which could have given them a higher payout in retirement than they would have got had they stayed within the additional State Pension (SERPS).  

If your National Insurance record started after April 2016 you will need 35 qualifying years to get the full rate of the new State Pension.

You can pay additional National Insurance Contributions to plug any gaps in your records. You can usually pay voluntary contributions for the past six years.

CAN YOU GET PENSION CREDIT?

If your weekly income is less than £218.15 – or your joint weekly income is less than £332.95 if you have a partner – will likely be entitled to Pension Credit which will top you up to that amount.

If your income is higher, you might still be eligible for Pension Credit if you have a disability, you care for someone, or you have housing costs.

You can get Pension Credit even if you have other income, savings or own your own home.

Claiming it will also unlock your entitlement to other benefits like Housing Benefit, a council tax discount, free TV licence and help with dental treatment costs.

Vahey says: “Many people don’t claim their entitlement to Pension Credit meaning they are surviving on a lower state pension than they are entitled to. Pension Credit can top up their income and can make a significant difference to quality of living.”

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