For many people, the State Pension is an important part of creating a retirement income. Whilst you are hopefully taking other steps to boost this income, such as contributing to a Workplace Pension or investing for the long term, understanding what the State Pension provides is crucial.
As the State Pension provides a reliable income, it can be used to provide some stability to your income. This is particularly important if you’re saving into a Defined Contribution pension and choose to take an income flexibly. It may not make up the bulk of your retirement income but how far would it go if you didn’t have any other provisions to fall back on?
How much does the State Pension pay?
How much you’ll receive from the State Pension will depend on your National Insurance contributions. To receive the full amount, you must have 35 years on your National Insurance record. You can check your National Insurance record here. If there are gaps in your record, voluntary contributions may be made and may increase the amount of State Pension you receive.
At present, the full State Pension would provide you with an income of £168.60 per week, or £8,767.20 a year. If you don’t have 35 qualifying years on your National Insurance record, you’ll receive a portion of the State Pension. The State Pension increases each tax year, thanks to the triple lock. This guarantees that the State Pension will rise by either 2.5%, the rate of inflation or average earnings growth, whichever is higher. This is subject to change with government legislation.
How far would £8,767.20 stretch in retirement?
Everyone’s spending in retirement is different but looking at an average can give you an idea of how long the State Pension would last if you had no other savings. Research from Just Group revealed that many would face a significant shortfall:
- The average one-person retired household average annual spending is £13,265.20, leaving a gap of £4,498
- For a retired couple, average annual expenditure is £26,244.40, leaving a shortfall of £8,710
Stephen Lowe, Group Communications Director at Just Group, said: “The average retiree given their whole year’s State Pension on January 1st would run out [on Wednesday 28th August] and have to start relying on their own funds.
“Of course, the State Pension is paid weekly, so it is spread over a year. But the date does help highlight that what the State provides each year is about four months or £4.500 short of what the average retiree spends each year, so it is important to build up other sources of income.”
The findings indicate that around two-thirds of expenditure is covered by the State Pension for an average retiree. However, with around four months of spending still to cover from other provisions, it’s important to look at how the State Pension fits into the bigger picture of retirement and the lifestyle you want to achieve.
If you’re hoping to spend retirement indulging hobbies and taking holidays, your State Pension is likely to leave a far bigger shortfall. Understanding what you want from retirement and the cost of doing this should form part of your retirement planning. The sooner you get to grips with your retirement expenses, the better the position you’ll find yourself in for reaching goals.
Supplementing the State Pension
Stephen Lowe added: “[The research] also shows how important it is not to rely solely on the State Pension, but to build up Private Pensions through a working life and use money wisely during retirement. It’s a reminder that failing to save or opting out of a Workplace Pension scheme can leave people struggling for income in later life.”
So, what are your options for supplementing a State Pension?
The most obvious answer is to save into a Workplace or Private Pension. Saving into a pension scheme means you’ll benefit from tax relief, topping up your contributions, and the money will usually be invested, hopefully delivering returns over the long term. In addition, your employer will also contribute to a Workplace Pension, boosting savings even further.
On top of your pension, you may choose other ways to save for retirement too. This could include building up an investment portfolio, savings or property, for example.
With these different strands of income in mind, it can be challenging to understand how much income you’ll receive in retirement and what your options are. This is where financial planning can provide you with some reassurances. It’s a process that can help you see what your dependable sources of income will be, such as the State Pension, Defined Benefit pensions, or an Annuity, and how these fit with more flexible sources.
Whilst the State Pension is something many of us will receive and will form the bedrock of retirement finances, how you supplement this and draw an income once you reach retirement should depend on your aspirations. If you’d like to discuss the State Pension and how it can support retirement plans, please get in touch.
Please note: A pension is a long-term investment not normally accessible until age 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Tax reliefs will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.