Basic vs New State Pension: Key Differences Explained

In this article, we take a look at the key differences between the two main types of State Pension: the Basic State Pension and the New State Pension – relevant to the CII’s R01, R04, R05, R06, AF1, AF7, and AF5 exams.

This article is correct as at 22 October 2024.

State Pensions

Let’s look at each of these in turn. 

Basic State Pension

The pre- April 2016 rules provided a pension made up of a Basic State Pension and possibly an Additional State Pension.

To qualify for the full Basic State Pension, you must have 30 qualifying years of National Insurance contributions (NICs) or credits. If you don’t have enough years’ contributions, your pension is reduced proportionally. So if you have only one year, you would get 1/30^th of the full pension.

Since the early 60s it has been augmented by an Additional State Pension:

• the State Graduated Pension Scheme ran from 1961 to 1975;
• the State Earnings Related Pension Scheme (SERPS) ran from 1978 to 2002; and
• the State Second Pension (S2P) ran from 2002 until 2016.

This means that someone who worked from 1974 to April 2016 could be entitled to the Basic State Pension, GPS, SERPS, and S2P.

Unlike the Basic State Pension, the Additional State Pensions are not universal and, in particular, the self-employed are excluded. They are all, to some extent, linked to pre-retirement earnings whereas the Basic State Pension is a flat rate. Finally, it was possible to opt out of them which was known as contracting out.

New State Pension

Those who reach State Pension Age after 6 April 2016 receive the New State Pension.  They need a minimum of ten qualifying years either through contributions or credits to receive any State Pension and 35 qualifying years to receive a full New State Pension.

Those people who had not reached their State Pension Age on 6 April 2016 had a starting amount (also known as the foundation amount) calculated:

• This was calculated on 5th April 2016 and was the higher of either their entitlement under the pre-6th April 2016 pension rules or their entitlement under the new State pension.
• Where someone’s foundation amount was more than the full amount of the new State pension in 2016/17 (£155.65 per week), the difference is called a protected payment, and this will be paid on top of the new State pension when that person reaches State Pension Age.
• If someone had previously been contracted out, a deduction called the rebate derived amount is applied to the new State pension valuation.

For those with an inadequate NIC record, class 3 NICs can be paid to increase entitlement to the New State Pension (and the Basic State Pension where they had reached pension age before 6 April 2016). Class 3 NICs increase the number of qualifying years. 

Increases in Payment

Both the Basic State Pension and the New State Pension increase each year by the greater of CPI, national average weekly earnings or 2.5%. This is known as the Triple Lock.

Additional State Pensions will also be increased but generally only by CPI. 

Deferring

There is the option of deferring both pre-6 April and post-6 April State pension past State pension age.

For those who reached State Pension Age before 6 April 2016, they could defer to get a higher pension or to get a taxable lump sum. The minimum deferral for a higher income was 5 weeks, which would give another 1% of all State pensions. So, if deferral was 12 months, it would increase by 10.4%.

If deferral was at least 12 months, the amount could be taken as a lump sum. Interest was given at 2% above base rate.

If death occurred, a spouse or civil partner could inherit 100% of the deferred benefits, subject to satisfying certain conditions set by the Department of Work and Pensions.

For those who reach State Pension Age on or after 6 April 2016, the rules are that individuals need to defer for at least 9 weeks to receive any increase in the income they receive, and the rate of increase has been reduced to 1% for every 9 weeks deferred.  This works out at an increase of just under 5.8% for every full year of deferral.  There is now no option to take the deferred amount as a lump sum, and a surviving spouse or civil partner is not able to inherit deferred State pension. Although the estate of the deceased may claim up to 3 months arrears of their State pension.

Pension Credit

For those on low incomes, there is a further benefit called Pension Credit. This comes in two types – the Guarantee Credit and the Savings Credit:

• If a person’s income is below the guarantee credit threshold, it will be topped up with Guarantee Credit. It is income and capital means tested and whilst the first £10,000 of savings is ignored every £500 or part in excess of this is deemed to produce £1 of notional income.
• Guarantee Credit is a disincentive to save so at age 65 Savings Credit is available but only to those people who reached their State Pension Age before 6 April 2016 and were already receiving Savings Credit and continue to be eligible for it. Savings Credit gives a small additional benefit to people who have saved.

Understanding the differences between the Basic and New State Pensions is crucial for effective financial planning, especially if you’re preparing for CII exams. Both pensions offer support in retirement, but eligibility, contribution requirements, and payment structures vary. By staying informed, you can better plan for your financial future.

Grab the resources you need!

If you’re studying for the CII R04 exam and feeling a bit unsure, try one of Brand Financial Training’s resources for free. Click the link to download our R04 mock exam paper taster now!

Alternatively, you can download a taster resource for any of AF1, AF5, AF7, R01, R05, or R06.