The UK State Pension is fairly complex and has been subject to several changes over the years. Despite calls for successive governments to simplify the system, it remains confusing and intimidating for many people. If you are feeling overwhelmed by the State Pension or simply want to find out more about how to get the best deal for yourself in retirement, then hopefully this short guide should help.
What is the State Pension?
Essentially, your State Pension is an income which you can start claiming from the government once you reach your “State Pension age”.
To receive a State Pension, you need to have built up at least 10 years of National Insurance Contributions (NICs). Most people automatically accrue NICs via their employer as contributions are deducted via payroll. Self-employed people pay NICs as part of their tax returns. If you are not working, you may be eligible for NI credits.
This makes your State Pension different from any workplace or private pensions you may have built up on a defined contribution basis. These schemes are designed to provide you with a retirement income, but the income will depend on the fund value you accumulate. State Pensions, on the other hand, provide a guaranteed income providing you have an adequate NIC record.
State Pensions are index-linked, and protected by the triple-lock. This means that your income is sheltered against the rise in the cost of living.
You may need to pay tax on your State Pension, but it is not deducted directly. Instead, any tax due will be taken from your other income or paid via Self-Assessment.
When do I get my State Pension?
As mentioned above, you can start claiming your State Pension once you reach your State Pension age. This will be different depending on your circumstances. For anyone retiring today, the State Pension age would be 66. However, this is due to gradually increase to age 68 between 2028 and 2046.
Be careful not to confuse your State Pension retirement age with the age from which you can start drawing from your non-State Pensions. You can take flexible withdrawals from your private pensions from age 55, although this is also increasing to remain 10 years below State Pension age. There is of course a risk of depleting your fund value if you withdraw too much too early.
You may also be able to access occupational defined benefit schemes early, although a penalty usually applies unless it forms part of a redundancy package.
It’s worth consulting a financial adviser before making any big decisions which might affect your income or lifestyle in retirement.
How much State Pension will I get?
The amount you get from your State Pension depends how many “qualifying years” of NICs you have made. To get the full new State Pension of £203.85 a week in 2023/2024 (i.e. £10,600 a year), you will need at least 35 years of NICs on your record.
However, you might get more or less than this amount depending on your circumstances as well as your NICs.
If you qualified for your State Pension on the 6th April 2016 or later, you might get more than £203.85 per week if you have built up additional State Pension under the previous scheme.
On the other hand, if you paid lower NICs during your career (e.g. due to contracting out) then you may receive less than this amount.
This is quite a complex area which varies from person to person. So once again, we recommend that you consult your financial adviser if you are at all uncertain about your State Pension entitlement.
How can I Increase my State Pension?
There are a few options to increase your State Pension if you have not built up the full amount.
One approach is to check your State Pension Forecast and identify any missing years in your NI record. You may be able to make voluntary contributions at a cost of £17.45 per week, or £907.40 if you are missing the full year. Considering this is worth £302 per year in guaranteed index-linked pension income for life, it’s a pretty good deal.
Normally you can fill any gaps in your record for the previous six years. However, there is a temporary extension in place which means that until April 2025 you can top up your record going back to 2006.
If you don’t take your pension at your State Pension age, it will be increased the longer you defer it. The increase is 1% for every 9-week period, or 5.8% if you defer for a full year. This amounts to around £11.82 extra per week based on current rates. This may be a useful option if you don’t need the income immediately. However, you might get a better deal if you take the pension income and save or invest it, or even top up your personal pension for added tax relief.
A financial adviser can help you navigate the options.
The State Pension and Financial Planning
It’s important to note that most people are unlikely to be able to afford a comfortable retirement simply on the full new State Pension. Costs have increased rapidly over the last few years and even with the triple-lock, £10,600 per year doesn’t go very far.
Research has shown that a single person needs at least £12,800 per year to provide a minimum standard of living. However, a general rule of thumb for a comfortable retirement is two thirds of your pre-retirement income. So, if you’re currently on £30,000 per year, a good starting point to estimate your required income in retirement is about £20,000. This assumes that many of your costs will go down or stop, including mortgage repayments, commuting costs, and of course, pension contributions.
It is important to speak with your financial adviser not only about maximising your State Pension income, but taking a holistic view of your retirement position and looking at ways to improve your overall income.
For some people, this might involve increasing contributions to a workplace or private pension scheme. In other cases, you might have other investments or a business you own, which could feature in your retirement plan.
Remember, it’s easy to underestimate your retirement expenses, even when you factor in adult children who no longer live at home, a fully-paid mortgage and eliminating the cost of commuting to work.
A professional financial adviser will be able to sit down with you and help you realistically assess your likely cash flow in retirement, so you can be better prepared ahead of time and make appropriate arrangements.
