A guide to your pension options

Everyone needs to plan ahead for retirement. People live longer and healthier lives, so it is even more important to think about how and when to save for your retirement and how long to work.

The basic State Pension will give you a start, but to have the lifestyle you want in retirement you need to think about a second pension, and the sooner you can start the better.

To help you, this guide tells you about the pension options that are available. It looks at some of the things you need to think about and tells you where you can find more information.

There are other guides that give more detailed information about particular areas of pensions. Return to the guides index to view these guides.

These guides provide simple, impartial information, but only you can make decisions about your pension.

Basic State Pension

You can build up entitlement to the basic State Pension if you pay, are treated as having paid, or are credited with, standard-rate National Insurance contributions. ‘Credited’ means that the Government has added some contributions to your National Insurance record for you.

From April 2000, you can be treated as having paid National Insurance contributions if your earnings are at or above the lower earnings limit and at or below the primary threshold (£79 a week and £91 a week in 2004/05). The primary threshold is the amount of earnings above which you will pay National Insurance contributions. In 2004/05, a person needs to have earnings of at least £79 a week (on which National Insurance contributions are paid or are treated as having been paid) to build up entitlement to a State Pension. This does not include earnings above the upper earnings limit of £31,720, on which there is now a 1% contribution.

The years during which you build up your entitlement to the basic State Pension are called ‘qualifying years’. The amount of basic State Pension you receive depends on the number of qualifying years built up before you reach State Pension age. You can’t choose to stop contributing to (contract out of) the basic State Pension.

If you are a man, you normally need 44 qualifying years to get a full (100 per cent) basic State Pension. If you are a woman who will reach the age of 60 before 2010, you need 39 qualifying years. However, when the State Pension age becomes 65 for both men and women (introduced from 2010 and fully in place by 2020), the number of qualifying years that a woman needs will increase to 44.

Some people do not get a full (100 per cent) basic State Pension because they have not paid enough contributions. They may only have worked for a few years, or they may have had earnings below a certain level (the lower earnings limit).

From 2010, if you choose to put off claiming your State Pension once you have reached State Pension age, you will earn extra State Pension at a rate of 10.4 per cent a year. You will be able to put off claiming your State Pension for as long as you want. The Government is proposing to provide an alternative lump-sum payment rather than an increase to your weekly pension if you put off claiming your pension. This will happen from 2005 and will depend on Parliament approving it. We will provide more details in the future.

If you want to find out more about state pensions, please see State pensions – Your guide (PM2).

Married women who have chosen:

• to pay the reduced rate of Class 1 contribution when an employee; and
• not to pay Class 2 contributions when self-employed

will not have built up any basic State Pension from the time that they made that choice.

It might benefit women in this position to cancel that choice and start to pay full-rate Class 1 National Insurance contributions. Depending on the level of their earnings, it is possible to start building up entitlement to a State Pension (as well as other contributory benefits) without actually paying Class 1 National Insurance contributions.

If you want to know more about married women's contributions, please see the Inland Revenue's leaflet National Insurance contributions for women with reduced elections (CA13), their website at www.inlandrevenue.gov.uk/faqs/women_reduced_rate.htm and our guide Pensions for women - Your guide (PM6)