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Warning! These 3 rules could cut your State Pension

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The current full new State Pension is £168.60 a week, or £8,777.60 a year. It’s designed to give retirees a steady, basic income after the age of 66 (for both men and women by April 2020).

However, what many don’t realise is there’s a range of rules and regulations that define how much you are entitled to in retirement. Breaking just one of these rules could lead to a dramatic reduction in your State Pension.

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Full record

Under the rules of the new State Pension, those reaching pension age on or after 6 April 2016, need at least 10 years of National Insurance (NI) contributions to qualify for a minimum weekly payment (about £48 a week). To be eligible for the full weekly payment, retirees need 35 years of NI contributions.

Each qualifying year on your NI record after 5 April 2016 will add about £4.82 a week to your new State Pension. If you have any gaps in your NI record, you can buy extra years for a one-off cash lump sum. As this could potentially be worth thousands of pounds over a lifetime, it’s usually worthwhile pursuing if you have any gaps.

Contracting out

The rules about NI contributions also mean you could end up being offered a reduced State Pension, even though you might have been working for the full 35 years.

Before the government introduced the new system, the State Pension was made up of two parts: the basic State Pension; and an additional State Pension.

Historically, workers who also took part in a defined benefit company pension scheme were ‘contracted out’ of the additional State Pension. This enabled workers to pay a lower NI level, as they were paying money into a private pension scheme. But this means they won’t be entitled to the full State Pension today.

The lower the level of NI contributions means many workers who were contracted out will not meet the 35-year entry requirement.

Taxable income

You could also see a reduction in your State Pension if you have income from other sources. State Pension income is treated just like any other income on your tax return. And if you have any additional income from sources such as investments, property, and self-employment, this will all add up. There’s also a range of other state benefits you might receive in retirement that are taxable. 


The best way to avoid all of the issues is to set up your own pension plan. The good news is, it doesn’t take much time or effort to set up a retirement fund cushion to protect your income in retirement. 

I recommend using a SIPP to start saving as any money you deposit attracts tax benefits. SIPPs also offer flexibility when it comes to investing your money. You can own a whole range of investments inside a SIPP depending on your risk preference.

For experienced investors, I recommend using a diversified portfolio of income stocks. But if that’s not for you, then my research shows an FTSE 100 tracker could be all you need to accumulate a substantial pension.

Indeed, over the past 10 years, the FTSE 100 has produced an annual return for investors in the region of 8%. Assuming this continues, I calculate an investment of just £200 a month would be enough to accumulate a pension pot worth nearly £300k over 30 years. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.