The State Pension is an important part of retirement planning. Depending on when you are able to receive the State Pension and how much you get, it can help provide security and a boost your income during retirement. However, research suggests many are overestimating how much they’ll receive.
When Which? asked people how much they thought the average person would receive from a State Pension for the 2020/21 tax year, a quarter said £175 per week, adding up to £9,100 per year. While this is the maximum amount you can receive from the State Pension without deferring, many people will receive less than this, for a variety of reasons. The average amount received from the State Pension is around £150 per week or £7,800 per year.
Worryingly, some people thought the State Pension was worth as much as £200 per week. This means, over an average retirement, they’re overestimating the amount they’ll receive from the State Pension by almost £50,000.
While you may be paying into other pensions, the State Pension is important. It provides a reliable and regular income throughout retirement and, as a result, it can help provide income stability or give you the option to access other assets flexibly.
How much will you receive from the State Pension?
For the upcoming 2021/22 tax year, the maximum State Pension is usually £175.20 per week or £9,110.40 per year. This is a rise of £228.80 compared to the previous tax year, which is thanks to the pension triple lock that guarantees it will increase by a minimum of 2.5% each tax year. This helps the State Pension keep pace with inflation and maintains the spending power of retirees.
However, not everyone will receive the full State Pension.
There are a variety of reasons why you may not be eligible for the full amount. Most commonly, it’s related to National Insurance contributions (NICs). You need a total of 35 qualifying years of NICs or credits to receive the full amount. If you have fewer years than this, you will receive a portion of the State Pension. If you’ve taken a career break or retired early, it could mean you don’t receive the full amount.
If you do have a NICs gap, it is sometimes possible to make voluntary contributions. This will involve paying a lump sum to make up lost years. However, this isn’t always an option and, even after making voluntary contributions, you still may not receive the full State Pension. You should check first.
“Contracting out” may also have affected your entitlement to the State Pension. This is where a deal has been struck between a company pension fund and the government. It allows employees and employers to make reduced NICs. In return, the company promises to provide a pension scheme to replace part of your State Pension. As a result, your company pension will have benefitted, but you will receive less from the State Pension.
When will you receive the State Pension?
Just as important as knowing how much you’ll receive, is understanding when you’ll receive the State Pension.
The State Pension age is now equal for men and women. In November 2018, it reached 65 but it is gradually increasing and now depends on when you were born. The State Pension age will reach 67 by 2028 and it’s expected to continue rising beyond this point.
For many people, when they’ll receive the State Pension plays an important role in when they can retire. It’s essential you understand when you’ll receive the State Pension before you make plans.
You don’t have to take your State Pension when you reach State Pension Age. You can choose to defer it. For every five weeks that you defer receiving the State Pension, it will increase by 1%. In some cases, deferring your State Pension can make financial sense. For example, if you’re still working it can reduce tax liability now while increasing your income when you retire.
Check your State Pension: Use the government’s State Pension forecast to find how much State Pension you could get and when you’ll reach State Pension Age. If you have any questions, please get in touch.
Creating your retirement income
The State Pension is an important part of your retirement income, it can be used to provide a secure foundation. However, you will still need to decide how to access other assets. This may include personal pensions, savings, investments, or property. It can be difficult to bring all these different assets together to create a retirement income that suits you, but this is an area that financial planning can help with.
Please contact us to discuss your retirement plans. We’re here to help you build an income that reflects your aspirations while providing financial security.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. 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. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.