For most of us the State Pension will provide a foundation to build a retirement income on. According to research, it’s worth £327,000 for someone reaching retirement today, surpassing the average amount held in Workplace and Personal Pensions.
With the State Pension now paying £168.80 per week to those eligible for the full amount, a retiree would need around £327,000 to purchase an Annuity that would guarantee the same level of income, according to figures from Aegon. The research highlights just how valuable the State Pension is when creating a retirement plan.
So, what are the key things you should know about your State Pension?
When do you receive your State Pension?
When you’ll start to receive the State Pension is likely to play some role in when you can afford to retire. The rising State Pension age has featured a lot in the news recently, with some women finding their State Pension age had been increased without them realising. For some affected, this has had a serious impact on their retirement plans and finances, demonstrating why it’s important to regularly check as you approach retirement.
The State Pension age has now equalised for men and women at 65. However, further increases are planned. Whether or not you’re affected by these will depend on when you were born. By 2028 the State Pension age will be 67 and is going to be kept under review, so future changes should be expected.
You can check when you’ll be eligible, under current legislation, to receive the State Pension here.
How much will you receive from the State Pension?
Under the new State Pension, those that qualify for the full amount will receive £168.80 per week in 2019/20; totalling £8,777.60 annually. To receive this amount, you must have 35 qualifying years on your National Insurance record.
However, if you’re approaching retirement now, you will have started paying National Insurance before the most recent changes. This may affect how much you’re entitled to. For instance, if you contributed to a SERP (State Earnings-Related Pension Scheme) whilst employed you may find the amount you receive an additional amount.
With different systems to calculate the State Pension over the years that you’ve contributed, it can be complex to work out how much you’ll receive. Again, you can check your State Pension forecast at the government website here.
What happens if my State Pension is lower than expected?
In some cases, your State Pension may be lower than expected if you don’t have enough National Insurance credits to receive the full amount. Where this is the case, you may have the option to buy further years. Buying voluntary Class 3 National Insurance contributions can top up your State Pension.
You can usually pay voluntary contributions for the past six years, though in some cases you may be able to fill gaps from further back. The amount voluntary contributions cost will vary, linked to when you were born. As a general guide, you should expect to pay around £15 for each week you want to make up, leading to a cost of around £780 for a year.
As a result, you should calculate how much you’ll receive in return to see if it’s worth it for you. Voluntary contributions won’t always increase your State Pension, so you need to assess this for your personal circumstances first.
Do you have to take your State Pension at retirement age?
You don’t have to start taking your State Pension at the State Pension age if you choose not to. In fact, you must claim your State Pension, if you don’t it will automatically be deferred.
If you continue to work past State Pension age or have other sources of income, you may decide to defer claiming it for tax purposes. It can also increase the amount you receive from the State Pension. For every five weeks that you defer it will increase by 5%. This works out as an additional 10.4% when deferred for a year. In monetary terms, this would provide an extra £13.44 per week or £698.88 annually for the rest of your life.
Alternatively, if you defer claiming your State Pension by at least 12 consecutive months, you can take it as a one-off lump sum, which will include interest of 2% above the Bank of England base rate.
Do you pay tax on the State Pension?
Your State Pension counts as income for tax purposes. Whilst the State Pension alone won’t exceed the Personal Allowance threshold of £12,500, it will use up a significant portion of it. As a result, you may need to pay Income Tax in retirement when you factor in income from other sources, including Personal or Workplace Pensions.
State Pensions: Part of your retirement income
Whilst the research shows the State Pension is a valuable part of retirement planning, it’s not enough for most people to comfortably live on. As a result, you should also consider what other financial provisions you have in place to achieve the retirement lifestyle you want.
Steven Cameron, Pensions Director at Aegon, commented: “For many people, the benefits they receive from the state will make up a core part of their retirement income and lifestyle. However, those some way off retirement should think seriously about whether they are confident the State Pension and other current entitlements will provide them with the lifestyle they aspire to in retirement. For most, the best and safest course of action will be to make additional pension provisions, for example by saving through a Workplace or Personal Pension.”
If you’d like to discuss how your savings can be used to create the retirement lifestyle you want, please get in touch.