Dear Client

State Pension was 100 years old on 1st January

Just over one hundred years ago the first pensioners went to the Post Office to collect a State Pension of 5 shillings a week. In 1909 half a million people over 70 got a pension. Now they number over 12 million, with more than 700,000 people reaching State Pension age in 2009 alone.

The Old Age Pensions Act 1908 created a means-tested State Pension of up to five shillings per week for some of the poorest pensioners aged 70 and above. To receive it people had to pass a ‘character test’. People were ruled out of a pension if they had refused work when able, made themselves poor in order to qualify, had been imprisoned or were habitually inebriated!

The full pension was 5 shillings (25p) for a single man or woman, 7s and 6d (38p) for a married man. In today’s money, that's £19.30 and £29.

At the beginning of the last century there were 10 workers for every pensioner. Today, the ratio is about four to one, and by 2050 it will be about two workers to each pensioner.

From April 2009, the Basic State Pension will go up by 5%, ensuring someone on a full pension will see their weekly income go up from £90.70 to £95.25. Pension Credit will also increase by the highest amount ever, up from £124.05 to £130 per week for a single pensioner.

Millions of women who have not worked and paid National Insurance contributions for a minimum of 10 years, may not qualify for any State Pension. But by buying extra years they can secure a pension worth £30,656, according to Standard Life, for a contribution of as little as £421.20. This represents a staggering return on investment of up to 7200%.

Women with less than 10 qualifying years of National Insurance contributions are entitled to no basic State Pension at all. But as soon as they reach the magic number of 10 qualifying years, they are entitled to a pension of 26% of the full Basic State Pension. This year, the full Basic State Pension is £90.70 a week, meaning that 10 qualifying years would be needed to get a pension of £23.58 a week.

If a woman only has nine qualifying years, the cost of buying Class 3 National Insurance contributions to get an extra year (and qualify for 26% of the full Basic State Pension) is only £421.20 or £8.10 a week. Yet, to buy an index-linked pension of £23.58 a week (or £1,226.26 a year) on the open market would cost £30,656.60 (for a 65-year-old woman).

Even if a woman already has 10 qualifying years, buying extra years could still be worthwhile. The open market cost of the extra State Pension bought by paying £421.20 in Class 3 National Insurance contributions varies between £2,358.20, which still represents a healthy return on investment of somewhere between 560% and 840%.

The cost of a Class 3 National Insurance contribution is likely to rise to £12.05 per week (£626.60 per annum) from April 2009. This represents a rise of almost 50% and anybody seeking to buy extra years should do so now before the cost increases. Both married and single women should consider buying extra years as the pension a woman would earn with her own contributions is higher than the married woman's pension.

The above obviously doesn’t apply to everybody. Many of us don’t have enough years before retirement to bring us up to a qualifying minimum of 10 years, plus you can only buy an additional 6 qualifying years at one time, so you need sufficient time to maximise the benefit.

For photos, archive material, and facts and figures on the state pension centenary, go to www.dwp.gov.uk/mediacentre/pensioncentenary/
For more information on pension reform, go to http://www.dwp.gov.uk/pensionsreform/
For information on the state pension and other benefits go to http://www.pensionservice.gov.uk/

For a State Pension Forecast, the telephone number is: 0845 300 0168 or email www.thepensionservice.gov.uk/state-pension/forecast/home

The pension images used in this newsletter are courtesy of the National Archives and the Parliamentary Archives.

If you have any queries please contact us.