Flat Rate State Pension (FRSP)

A summary of the Flat Rate State Pension which took effect from April 2016 is given below:

  • New rules for calculating State Pensions took effect from 6 April 2016.
  • These changes announced in the Pensions Act 2014 which received Royal Assent in May 2014.
  • For people reaching State Pension Age after 6 April 2016 the current State Pension, made up of Basic State Pension (BSP), Additional State Pension (ASP) and Graduated Pension (GP) will be replaced by the new Flat Rate State Pension (FRSP), the maximum amount of which was £155.65 per week in 2016.
  • BSP and ASP will cease to accrue from 6 April 2016.
  •  From April 2020 the maximum Flat Rate State Pension is £175.20 per week.
  • The £175.20 p.w. is the maximum and is accrued over 35 years. If have less paid or credited years National Insurance payments, you only get the relevant proportion of this, for example 20 years of credits means Flat Rate Pension = £175.20 x 20/35. In addition if you have been contracted out for any time before 6 April 2016 the formula of £175.20 x 20/35 is reduced by a “Rebate derived amount”, which appears similar to the old contracted out deduction. No such deduction however appears to apply to Self Employed people even though they will have been paying lower NI Contributions than employed people paying Class 1 NI Contributions in the past.
  • The minimum number of years of contributions to qualify at all for the new flat rate pension is 10 years. If you have fewer credited years than this at State Pension Age, your Flat Rate pension will be £0.
  • The £175.20 per week is subject to the Government’s Triple Lock of guaranteed increase in April each year as the BSP is currently, that is an increase equal to the greater of 2.5%, or CPI (in the year to previous September) or the increase in average earnings.
  • For anyone who reaches State Pension Age after 6 April 2016, the Government will calculate the total BSP+ASP+GP that an individual has accrued at 6 April 2016. This is compared with their accrued FRSP (1/35 x service x £155.65 p.w.) less any “Rebate derived amount” for anyone who has been contracted out in the past and the higher of the two figures is referred to as their “Foundation Amount” at 6 April 2016. On reaching State Pension Age, an individual will receive a Flat Rate State Pension at least equal to their Foundation Amount together with State Pension indexation increases that have been added to this since April 2016. Should the Foundation Amount at 6 April 2016 be lower than £155.65 p.w., the individual will continue to accrue State Pension benefit for each tax year that they have paid or been credited with National Insurance contributions since that time. Once their accrued Flat Rate State Pension has reached the maximum level (currently £175.20 p.w. in the 2020/21 tax year) they will not be able to earn any extra Flat Rate State Pension above that level. The maximum level that they have reached will however, continue to benefit from State Pension revaluation increases granted by the UK Government in future tax years. The amount of indexation granted will follow the revaluation rules set out above (currently based on the Triple Lock rules).
  • Individuals can defer taking the FRSP from their State Pension Age (SPA) until a later date in return for an enhanced pension should they wish to do so.
  • If you reached State Pension Age prior to 6 April 2016 you will not be affected by these changes and will receive State Pension at your SPA as per the old Basic State Pension rules.
  • Contracting out ceased from 6 April 2016, at the same time that the FRSP was introduced.
  • From the time that contracting out ceased, employers and employees in contracted out pension schemers saw a large hike in their National Insurance (NI) Contributions bill each month as they started to pay NI contributions at the higher “Contracted In“ rate rather than at the lower “Contracted Out” rate. This led to increased NI contributions of 3.4% of Band Earnings for employers and 1.4% of Band Earnings for employees.
  • In relation to State Pension Ages, the Government has committed to commission an independent review of life expectancy every 5 years, and if this is seen to have increased, it will be possible to adjust an individual’s future State Pension Ages as a consequence of this without needing new Primary Legislation (i.e. a new Act of Parliament) every time a change to State Pension Ages needs to be put through. In considering whether a change to SPA is appropriate at a future review date, the Government considers many different criteria, one key objective often being that people will maintain a specific proportion of their adult life receiving State Pension.