Everything you should know about the State Pension and its role in your retirement planning

Since the Old Age Pension was introduced more than a century ago, it has provided a valuable income to millions of retirees. While just half a million people claimed their pension in 1908, by February 2019 this number had increased to 13 million.

While changes have been made to the State Pension over the last few decades, the foundations of linking it to National Insurance contributions to provide a basic level of income has remained the same since 1948.

Here’s your comprehensive guide to the State Pension and the role it will play in your retirement.

When can I claim the State Pension?

Over recent years the retirement age for both men and women has been increasing, and by October 2020, the State Pension age for all will reach 66.

There are also planned increases in place which will see it reach 67 by 2028 and 68 by 2046.

The government’s State Pension calculator will tell you when you’ll reach State Pension age under the current rules.

How much is the State Pension?

The new State Pension was introduced for people reaching State Pension age from 6 April 2016. As before, the amount of State Pension that you receive will depend on the number of ‘qualifying years’ of National Insurance contributions you have.

Qualifying years can include years where you were:

• Employed and earning more than £183 a week from one employer
• Self-employed and paying National Insurance contributions
• Claiming Child Benefit for a child under 12 (or under 16 before 2010)
• Getting Jobseeker’s Allowance or Employment and Support Allowance
• Getting Carer’s Allowance.

You may still get a qualifying year if you earn between £120 and £183 a week from one employer.

You can check your National Insurance record on the government website. If there are gaps, it is often possible to make voluntary contributions to bridge this. However, be aware that this doesn’t always increase the amount of State Pension you receive, so be sure to check first.

To receive the full State Pension, you must have 35 ‘qualifying years’ on your National Insurance record. For the 2020/21 tax year, those receiving the full State Pension will receive £175.20 per week, (£9,110.40 annually).

To receive any State Pension at all, you must have a minimum of ten years of National Insurance credits. If you have between ten and 35 years, you’ll receive a State Pension based on the number of years built up.

So, if you have 23 years on your record, you’d receive roughly two-thirds of the State Pension or about £117 per week.

Understanding the Triple Lock

In 2010, the government introduced the State Pension ‘triple lock’ which ensures that the value of the State Pension keeps pace with inflation. Under the triple lock, the State Pension increases each year by the highest of three measures:

• Inflation
• Average earnings growth
• 2.5%

As a result, your State Pension income will rise at the start of every tax year by at least 2.5%. For the 2020/21 tax year, the State Pension increased by 3.9% matching the average earning increase seen by UK workers in July last year.

It’s important to note that there has been speculation in recent weeks that the government may suspend the triple lock for a year or two as a consequence of the coronavirus pandemic.

Due to a quirk with the way the triple lock is calculated, the ‘furlough’ scheme could result in an artificial increase in earnings in 2021. The independent Resolution Foundation has calculated that the State Pension could therefore rise by 7.6% over the next two years, potentially costing an additional £3 billion a year.

Why your State Pension may be higher (or lower) than you expect

In addition to the number of ‘qualifying years’ you have, two other factors could affect the amount of State Pension that you receive.

1. Additional State Pension

While it’s no longer possible to build up additional State Pension, the government has allowed many workers to keep any existing entitlement they built up between 1978 and 2016. This could increase the amount you’ll receive when you reach retirement age.

The Additional State Pension is also known as the second State Pension, S2P and SERPS. This now redundant option allowed people to top-up their basic State Pension.

Understanding what additional State Pension means for your retirement income can be difficult. It involves a ‘starting sum’ calculation that compares your entitlement under the old and new regime, you’ll then receive the higher of the two. If you have any questions about SERPS and your retirement, please get in touch.

2. Contracting out

Until 2016 it was possible to ‘contract out’ of the State Pension. This meant that you may have paid a lower rate of National Insurance contributions and, in return, this money would have been paid into your workplace pension scheme (or your employer would have done so on your behalf).

In most cases, those affected by contracting out have a Defined Benefit pension scheme (also known as a Final Salary Pension). Find out if you were ever contracted out of the State Pension on the government website.

If you contracted out in the past, it could affect how much State Pension you’ll receive.

How does the State Pension fit into retirement plans?

The State Pension isn’t something that should be looked at and reviewed alone. Instead, it’s important to assess it alongside the other retirement provision you have made.

For example, it could boost the income you’ll receive from your Final Salary pension, allowing you to meet aspirations that you previously thought were out of reach.

Alternatively, you may have decided to access a Defined Contribution pension through drawdown and the State Pension means you can reduce withdrawals and still maintain your lifestyle. This can help your private pension go further and perhaps leave a legacy for loved ones.

If you don’t need the income immediately, you may also decide to defer your State Pension. For every nine weeks you defer, your State Pension will increase by 1%. Defer for a full year and this works out at just under 5.8%.

Understanding your State Pension and the stable income it will deliver for the rest of your life can also provide confidence as you plan your retirement. It’s a safety net that can ensure essential outgoings are met and help you achieve the retirement lifestyle you’ve been looking forward to.

Your handy State Pension checklist

1. Check when you’ll reach State Pension age here
2. Review your National Insurance record here
3. See if you were contracted out of the State Pension here and review if you have ever made additional State Pension contributions
4. Decide when you want to claim your State Pension. Information on how to do so can be found here
5. Incorporate your State Pension into your wider retirement plans and finances

Get in touch

It’s important to regularly review your pension provision to ensure you have enough to maintain your desired lifestyle in retirement. The State Pension is likely to form part of this, alongside other pension provision you have made.

To arrange your review, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.