A recent query from a UK couple highlights a common but often misunderstood aspect of the state pension system: why two individuals with seemingly identical National Insurance contribution records can receive different weekly payments. Despite both having 35 years of contributions, the husband is projected to receive £258.01 per week, while his wife is set to receive £231.05, a difference of £26.96.
This disparity primarily originates from the rules surrounding the state pension system prior to April 2016, when the new State Pension was introduced. Before this date, the state pension was comprised of a basic state pension and an Additional State Pension, often referred to as SERPS (State Earnings-Related Pension Scheme) or the State Second Pension. Many individuals, particularly those with occupational pensions, opted to 'contract out' of the Additional State Pension.
Contracting out meant that an individual and their employer paid a lower rate of National Insurance contributions. In return, they gave up their entitlement to the Additional State Pension, with the expectation that their occupational pension scheme would provide a similar or better level of benefit. While this was often beneficial at the time, it means that when their state pension is calculated under the current system, a 'deduction' is made to account for the period they were contracted out and paid lower National Insurance.
The new State Pension system, which came into effect in April 2016, aimed to simplify entitlements, moving towards a single-tier payment. However, the calculation for those who reached state pension age after this date still takes into account their National Insurance history under the old system. The starting amount for the new State Pension is based on a comparison of what an individual would have received under the old rules and what they would have received if the new rules had been in place for their entire working life. Any period of contracting out would typically result in a lower starting amount under the new system.
The specific difference between the husband and wife's projected payments strongly suggests that one, or both, were contracted out for different periods or under different arrangements. It is not uncommon for men, particularly those in certain industries or with longer careers in occupational schemes, to have been contracted out for longer periods than women, or vice versa, depending on individual career paths and pension choices made decades ago. Understanding these historical choices is key to deciphering current pension forecasts.