Pensions FAQ

How are UK Pensions Funded?

Contrary to popular belief, the UK State Pension is not paid from a large pension investment fund. Instead, it is operated as the UK State Pension “Pay As You Go” (PAYG) scheme. In simple terms, the National Insurance Contributions made this month pays next month’s pensions to retired people.

This differs from Workplace Pensions, in that there is no set “Pension Pot” into which you pay while you are working and then withdraw from it when you retire. Instead, this month’s NIC payers are the only contributors to next month’s pension payments.

How Does the UK State Pension Work?

The UK Government changed the State Pension system, now called the Newly Retired State Pension, on 6 April 2016. These changes will apply to anyone who reaches State Pension age from then on. This is men born on or after 6 April 1951 and women born on or after 6 April 1953.

For those born before those dates who are recipients of a State Pension, known as the Basic State Pension and the Additional State Pension, they will remain on this system and get no extra money. For those on the Newly Retired State Pension (about 15% of recipients) they will receive weekly payments of £203.85. While those on the Basic State Pension system will continue to receive an unfairly lower figure of £156.20 per week (though they may receive additional income via the Additional State Pension). Those on the lower Basic State Pension can however, be eligible to claim various meanest tested benefits such as Pension Credit and Housing Benefit.

Who would introduce the Wellbeing Pension?

Only the UK Government can implement the Wellbeing Pension as policy. Currently, control over pensions policy is not devolved to Scotland and Wales; it is the sole responsibility of Westminster

In the case of Northern Ireland however, pension policy is technically devolved but they are not allowed to diverge from the UK in accordance with the power sharing agreement. That means that regardless of whether you live in the UK, the UK Government has to agree to providing the Wellbeing Pension.

What will Happen to My Pension Credit?

If your state pension increases due to the Wellbeing Pension, this may reduce the amount of Pension Credit you are entitled to. However, the total income provided from the Wellbeing Pension and Pension Credits combined will still be greater than what you would receive under the current State Pension system.

Where Will the Money for the Wellbeing Pension Come From?

Since UK pensions work on a “Pay-As-You-Go” system, the pension payments which are sent out this month come from last month’s National Insurance Contributions. We have calculated that the current State Pension system costs the UK government £123 billion annually. If the Wellbeing Pension was adopted at the level of £235 per week, this would increase the cost to the UK government to £167.7 billion annually.

However, although this is a significant increase, the Office for Budget Responsibility has forecast that the revenue generated from National Insurance Contributions will be worth £172.3 billion in 2022/23. This is more than enough to give pensioners in our society a fair standard of living.

How will this Increase Impact On My Private Pension?

The introduction of the Wellbeing Pension would not affect your ability to pay into, or receive any private pension you may have. You will receive your payout from your private pension alongside the Wellbeing Pension when you reach retirement age.

How would the Wellbeing Pension change for couples?

The Wellbeing Pension for couples would be determined in the same way as the current State Pension. This means that your entitlement to the Wellbeing Pension would not be based on your marital status.

Would I still receive the Wellbeing Pension if I moved abroad?

Yes. The UK Government currently pays the state pension to anyone who retires to a foreign country, as long as they have contributed the qualifying amount of NICs. That means that a Wellbeing Pension would also be paid to any pensioners that moved abroad according to the Minimum Income Standard. This would be paid regardless of which country you moved to.

How was the Figure of £235 Reached?

The figure of £235 was the amount calculated as the minimum for pensioners to live without falling into poverty. The Wellbeing Pension was derived in accordance with research conducted by Scotianomics into the pension system in the UK.

Scotianomics adopted tried and tested approaches such as those used to calculate the Real Living wage and an adapted Minimum Income Standard for pensioners as set out by the Joseph Rowntree Foundation. £235 per week meets the basic Minimum Income Standard for pensioners who have not had the opportunity to pay into a private pension. Thus it is a safety net amount and a portion of it may be met by Pension Credit.

What If I Qualify for No State Pension?

If you do not qualify for a State Pension you may be eligible for Pension Credit. Pension Credit is an income-related benefit that tops up your weekly income to a guaranteed minimum amount if you have reached the Pension Credit qualifying age. If you are in a couple, the amount you get depends on your joint income and capital (including savings and investments). This represents no change to the current system except that the Minimum Income Standard of £235 has been adopted.