This article is part of a series describing different pension systems around the world. You will find the other articles already published at the bottom.

History of the UK Pension

The first pension schemes in the UK were actually organized for Royal Navy Officers in the 1670s. In 1908, the arrangement was formalized with the creation of the Old Age Pensions Act. Sir William Beveridge, father of the welfare state, was an adviser on the program that provided assistance to the elderly and honored them on January lst, 1909 with "Pensions Day". 

Eventually, the program became more uniform and in 1946 the National Insurance Act was passed, allowing for state pensions for all. Initially pensions were 1.30 pounds a week for a single person and 2.10 pounds for a married couple. Thatcher's conservatives in the 1980s established the Social Security Act which broke the link between state pension increases and average earnings.

2001 brought the introduction of stakeholder pensions, a low-cost pensions scheme aimed at people on low to average earnings. In April 2006, the regulations regarding pensions were greatly simplified and made more flexible.

National Insurance Number

A national insurance number is your own personal account number and is necessary to set-up a pension. It is necessary to have a number to contribute to the National Insurance contributions. It also acts as a reference number when communicating with the Department of Work and Pensions and HM Revenue & Customs (HMRC).

• People born in the UK are assigned an NI number and receive a plastic numbercard shortly before their 16th birthday.
• People from abroad who wish to work in the UK, or those to whom a number was not initially allocated as children, may apply for a number through the Department for Work and Pensions.

State Pension Plan

Basic State Pension

Basic state pensions apply to anyone who has enough qualifying years from their National Insurance (NI) contributions.

Benefits are based on how much has been paid into the National Insurance contributions and several other factors.

Factors:
• How many qualifying years you have built up to date
• The number of years before you reach State Pension age
• Whether you may be affected by changes to the State Pension

In 2010-11, the maximum basic State Pension is 97.65 pounds a week for each person. Use the State Pension profiler to estimate how much you can collect and when.

Claiming your benefits is fairly automatic as the Pension Service should send a State Pension Information Booklet and invite you to claim four months before you reach State Pension age. If you haven't received the booklet within three months, call the State Pension claim line at 0800 731 7898 from 8:00 to 20:00 (Welsh information 0800 731 7936).

Documents needed to file claim:
• National Insurance number
• Current address and postcode, plus your last two addresses
• Tax reference number
• If you're married or in a civil partnership, bring the husband's/wife's/partner's details (this includes their NI number and the date of your marriage or civil partnership)
• If you're divorced or widowed or your civil partnership has dissolved or you're a surviving civil partner, bring documentation of dates including details of any social security benefits or entitlements that you or your husband, wife or civil partner are getting or waiting to hear about
• Address of any employer you've worked for in the last two years, and the dates that you worked for them
• If you've ever lived or worked outside the UK, bring your social security number and relevant dates

The State Pension will be paid directly into your bank, building society, Post Office or National Savings account that accepts Direct Debit payment.

Additional State Pension

You can build up additional funds if you are below State Pension age and you are:

• Employed by a company and earning over 5,044 pounds/year (from any one job)
• Looking after children under 12 years old and claiming child benefit
• Caring for a sick or disabled person for more than 20 hours a week and claiming Carer's Credit
• A registered foster carer and claiming Carer's Credit
• Receiving certain other benefits due to illness or disability

Originally known as State Earnings-Related Pension Scheme (SERPS), the additional pension plan should be received when you claim your basic State Pension.

Age of Eligibility

Currently, the State Pension age for men is 65 and 60 for women.

The age of women's retirement is increasing gradually from 60 to 65, to match men's. It is expected that from December 2018 the State Pension age for both men and women would start to increase to reach 66 by April 2020.

If you put off claiming State Pension, you can earn:
Extra State Pension (If you put off claiming your State Pension for at least five weeks you can earn an increase to your State Pension of 1 per cent for every five weeks you put off claiming.)
or a One-off taxable lump sum payment (If you put off claiming your State Pension continuously for at least 12 months, you can choose to receive a lump sum payment and your State Pension paid at the normal rate).
You can do this by working past the State Pension age, or by stop claiming benefits after having claimed it for a period.

To calculate your State Pension age, use the calculator.

Company Pension Plan

There are different types of company pension plans or occupational pensions available. Company pension plans usually require you to make a regular contribution based on a percentage of your salary. You receive tax relief on the money paid into the pension. Though it depends on the company, there are generally two types: a salary related or money purchase scheme.

Salary Related Scheme

In a salary related scheme, the amount of your fund is based on your salary and the number of years you have been in the scheme.

Money Purchase Scheme

A money purchase scheme's benefit is determined by how much has been paid into the scheme and how well the money has been invested.

In either case, the deposit structure is the same. For example:

1. Anna puts 40 pounds a month into her company pension scheme
2. Anna's pension contribution reduces her taxable pay so she pays less tax on her total pay
3. Anna's employer puts in another 40 pounds every month
4. Total = 80 pounds a month to Anna's pension

Benefits

Final salary scheme - The amount of pension received is based on your salary and the number of years you've been in the scheme.
Money purchase scheme - The amount of pension received is based on how much you and your employer have contributed and the interest or growth that has been earned. At retirement, your fund is used to provide your pension, often by buying an annuity (a regular income for life). How much your fund will continue to provide is calculated using an annuity rate which depends on factors such as your age, sex, and interest rates at the time.

Claiming Your Pension

When and how you can claim your pension depends on the company. This will be outlined in the scheme's rules. However, a forecast of how much you will receive when you retire, estimates of any survivor's benefits that may become payable, and how much you will get if you have to retire early due to ill health should be readily available. In a change in legislation from 2006, you are able to draw on your pension and continue to work for the same employer.

Personal Pension Plan

It is a great investment in your future to set-up a personal pension plan to supplement the income you receive from a state pension. Anyone can set one up whether they are employed, self-employed or not working. Private pensions are available from banks, building societies and life insurance companies. Once it is established, you can control how much money you pay into it.

A personal plan does not effect basic State Pension, but may reduce the amount of additional State Pension you can build. However, you will be able to receive tax relief on the amount you put in. For example, for every 80 pounds you pay into a personal pension, the Government adds an extra 20 pounds into the fund. This is subject to an upper "annual allowance" of 255,000 pounds for the 2010-11 tax year. Savings above the annual allowance will be subject to a tax charge. Also, for those making over 150,000 pounds annually, tax relief will be reduced.

A personal pensions is best for:
• Self-employed
• People who are not working but can afford to pay for a pension
• Employees whose employer does not offer a company pension scheme or they choose not to participate
• Employees on a moderate income who wish to top up the money they would get from a company pension

The Pensions Advisory Service (TPAS) are a great resource for questions about setting-up or running a pension fund. They also respond to citizens with a problem, complaint or dispute with their occupational or private pension arrangement.

Benefits

A yearly forecast informs investors of the status of the fund (expected pay-out, final value depending on performance; charges of running the fund will be deducted).

Upon retiring, you can take up to 25 per cent of the value of your total personal pension savings as a tax-free lump sum.
You then have two options:
1. Use the remaining fund to buy an annuity (a regular income payable for life) from a life insurance company
2. Take an income (taxed at your normal Income Tax rate) from the remainder of your fund while it continues to be invested – as an "unsecured pension" up to age 75 or an "alternatively secured pension" once you reach age 75.

Age of Eligibility

The earliest age at which you can take your personal pension is 55. Some funds allow you to take your pension out before this point, but this is uncommon.

It is common to wait until age 60 or 65 and take this money out in tandem with the state fund, but you do not have to retire from work to get your pension benefits. You can wait to close the fund until 75 if you wish.

Stakeholder Pension

A type of personal pension, stakeholder pensions are similar to other money purchase pensions. The difference is that these pensions must meet a number of minimum standards. The standards include:

• Limit on annual management charges (Managers can charge fees of up to one and a half per cent of the pension fund each year for the first 10 years you hold the product, and thereafter up to one per cent)
• Flexibility: (1. you can switch to a different pension provider without the provider you leave charging you, 2. you can start contributions at 20 pounds, 3. payment can be every week, month or at less regular intervals, you can stop, re-start or change your contributions without fees)
• Security: (Plans are run by trustees or by an authorized stakeholder manager)
• Contribution levels and tax relief: (You can contribute as much as you want. You get tax relief on contributions of up to 100 per cent of your earnings each year).

Expats

The system of collecting state pension is a bit more complicated for British living abroad, and for expats living and working in the UK. Expats can claim their State Pension if living outside the UK. However, you'll only receive the yearly index-linked increases if living within the European Economic Area (EEA) or Switzerland or in a country with which the UK has a social security agreement regarding state pensions.

Making Contributions while Abroad

If you're working abroad, you may be able to pay into the State Pension scheme of the country where you're working. This is easily arranged with EEA countries. Depending on how long you work abroad, you can have your contributions credited to your UK State Pension or you could receive two pensions - one from the UK and one from the country where you lived and worked. This will be decided when you reach State Pension age, taking into account where you live.

European rules provide coordination between the different social security organisation for European pension rights. You can benefit from this coordination if you are a citizen of the European Economic Area (EEA: European Union + Norway, Iceland, Liechtenstein and Switzerland). The age from when it is possible to claim benefits depends on the country in charge of settling the pension (the different periods must be validated by each state where it has been contributed).

Each institution where you contributed will calculate the amount to be paid according to:
- its legislation (national pension)
- by adding together all working periods in all the state members, and calculating proportionally with the time spent in the state (Proportional or communitarian pension)

Each state that will calculate a pension on your behalf will do the payment.
The initial request is made in the country where you are resident at the time of the demand. This institution will be in charge of liaising with the other countries. The payment of each country depends usually on the rules existing in each state.

Information on EU site: Mutual Information System on Social Protection

For more information on pensions in the European Union, including calculation and example, see our FAQ.

Claiming from Abroad

If you move abroad before becoming eligible for State Pension, you should have updated your contact information upon leaving the country and the registration will come to the address on file. There will be information about how to make a claim while living abroad. The International Pension Centre can usually make payments directly into a bank in the country in which you live or a bank or building society in the UK. Payment will be made in the local currency at no charge. Eligible countries includes: Eurozone + Antigua, Australia, Bahamas, Bangladesh, Barbados, Barbuda, Bulgaria, Canada, Channel Islands, Colombia, Denmark, Dominica (Commonwealth), Dominican Republic, Egypt, Grenada, Guyana, Hong Kong, India, Indonesia, Israel, Jamaica, Mexico, Morocco, New Zealand, Nigeria, Norway, Pakistan, Peru, Poland, San Marino, South Africa, St Kitts – Nevis, St Lucia, St Vincent and Grenadines, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, United States of America, and Yemen. 

If you reside in an ineligible country, State Pension is paid directly into any UK bank account or with a Sterling cheque to your home address.

Paying Tax on State Pension

You may need to pay tax on your state pension if you are classed as a "non-UK resident" for tax purposes. If you spend part of your time in the UK and part abroad you're likely to be classed as a UK resident. If you live abroad permanently, you're likely to be classed as a non-UK resident.

Non-resident, your tax position depends on whether you live in a country with a double taxation agreement with the UK. This means you will not have to pay UK tax on your State Pension, but it will be taxable in the country where you live. If you live in a country without a double taxation agreement, you'll have to pay UK tax and may be taxed again abroad.

Government Agencies to Inform of Your Move

If you're moving abroad to live, you'll need to tell:
• International Pension Centre
• HM Revenue & Customs' National Insurance Contributions Office
• Tax Office

The International Pension Centre (tel: 44 191 218 7777) handles all issues regarding the payment of State Pension, bereavement benefits, incapacity benefits and other benefits for those living abroad.

Read about other pension systems:

• USA Pension Plans
• French Pension Plans
• German Pension Plans

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