What’s graduated retirement benefits?

The state pension system has gone through various changes to provide better benefits to eligible retirees. One of these changes is the graduated retirement benefit that is paid as a top-up to the basic state pension. To be eligible for the graduated retirement benefit, you must meet several requirements.

Graduated retirement benefit is paid as a top-up to the basic state pension. You may be eligible to receive graduated retirement benefits if you worked for an employer and paid graduated National Insurance Contributions (NICs) between 1961 and 1975 as part of the graduated pension scheme. The amount of graduated retirement benefits you receive depends on the amount you paid in graduated NICs.

What is graduated retirement benefits?

The graduated retirement benefit is an additional benefit for people who paid graduated contributions in addition to their pension contributions. Many retired workers who are receiving state pensions receive a top-up payment for the graduated retirement benefit.  

The benefit was introduced by the National Insurance Act of 1959 as the first State scheme to provide earnings-related pension payments as a top-up to the basic State Pension. This act was replaced by the State Earnings Related Pension Scheme (SERPS) in 1978.

Who is eligible for a graduated pension?

To be eligible for graduated pensions, you must have paid graduated NICs between April 1961 and April 1975. You will have paid graduated pensions if you were over age 18, you had an employer and paid income taxes, and you earned at least £9 a week at the time. The benefit was not available to self-employed workers.

Retirees who are eligible to receive graduated retirement benefits must have reached the state pension age (SPA) before April 6, 2016. If you reached the SPA after April 5, 2016, you won’t be eligible to receive any Graduated Retirement Benefit. Instead, you will get the New State Pension, and any accrued Graduated Retirement Benefit will count towards the “foundation amount” for the new state pension.  

What is the basic state pension?

The basic state pension is a flat-rate pension funded by NICs for workers who attained the SPA before April 6, 2016. Workers who reach the SPA after April 6, 2016, will be eligible for the New State Pension.

The basic state pension rate is determined each year through the budget. For the 2023/2024 tax year, a single person with adequate NIC records will receive £156.20 every week, while a married couple will receive £249.80 a week. You can claim the benefit immediately after reaching the SPA, or defer the pension and receive payments at a later date.

What is the New State Pension?

The New State Pension took effect on April 6, 2016, and it replaced the existing State Pension Scheme. The old pension scheme comprised a basic State Pension and a Graduated Retirement Benefit. If you reached the State Pension age after April 6, 2016, you will receive the State Pension under the New State Pension scheme.

However, you will need a minimum of 10 qualifying years on your contributions when you reach the SPA to receive the New State pension. If you are divorced, you may get a share of your former spouse’s State Pension. You will be eligible to receive benefits on your former spouse’s record once you attain the SPA, even if you do not meet the minimum qualifying period.

How to calculate the graduated retirement benefit

The amount of graduated pension that an individual receives depends on the number of units purchased by the graduated NICs they paid. The number of units is determined by dividing the graduated NIC by 7.5 (for men), 9 (for women who reached SPA before April 6, 2010), or 7.5 (for women who reached SPA on or after April 6, 2010).

The maximum number of units you can buy is 86 for a man and 72 for a woman. The weekly pension payments can be determined by multiplying the units by the unit price, which is set each year. Generally, graduated retirement benefits comprise a small portion of a retiree’s state pension.

How to claim a graduated pension

When you are four months away from attaining the state pension age, you will receive a letter detailing what you need to do to get your state pension. Once you reach the SPA and claim payments, you will receive your basic pension and graduated retirement benefits as an add-on to the pension.

Once you start receiving pension payments, you will receive a state pension state, showing the separate amounts for the basic state pension and the additional pension payments including any graduated retirement benefit.

If you don’t need the pension payments immediately, you can put off claiming your state pension payments until a later time. You can defer your state pension, and only claim the payments at a future date when you need the payments.

Taxes on graduated retirement benefit

The State pension payments and any graduated retirement benefit you receive count as taxable income. However, you will only pay income taxes if the state pension payments exceed your taxable allowance. Usually, the pension payments are added to any other income you receive, and if the total income exceeds the individual’s personal income tax allowance, the income tax owed is deducted from the other income.

If you receive lump sum payments due to a deferred state pension, you will pay income taxes at the maximum tax rate that would be applicable during the tax year, had the lump sum not been paid. For example, if 20% was the highest rate an individual would have paid, the lump sum payment would be taxed at that rate. However, if the total income is within the individual’s personal allowance, the lump sum payment won’t be taxed. Generally, any tax owed on the lump sum payment is deducted before the payment is made.