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Managing my money for young adults
Managing my money for young adults

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7  The state pension

This is an image of David Lloyd George on a stamp.
Figure 5 State old-age pensions were first introduced by Lloyd George in 1909. The first state pensions paid 5 shillings (25 pence) per week in 1909 – that is equivalent to around £25 in today’s money!

Limited state retirement pensions were first paid in the UK in 1909. These were improved in the 1946 National Insurance Act, which brought in flat-rate universal state pensions (with effect from 1948).

While various developments in state pensions have taken place since then, the main thrust of policy between 1980 and 2016 was to limit public expenditure on state pensions.

The UK government plans staged rises in the age at which people can receive their state pension, with it reaching 68 years in the 2030s, and with further increases possible. Many predict that the state pension age will eventually rise to 70 years. One aim of these moves is that, on average, no more than a third of adult life should be spent in retirement. So the longer the population lives on average the higher will be the state pension age (SPA).

Since 2011 the state pension has increased each year with the higher of either earnings inflation, price inflation or 2.5%. This rule is referred to as the ‘triple-lock’. It means that, in future, the state pension should retain its value relative to earnings (or even rise a little faster). This arrangement for the annual increase in pensions was suspended for 2022/23 as the impact of the Covid-19 resulted in a spike in earnings inflation when the economy recovered after the 2020 ‘lock-downs’. An increase of 3.1% was applied instead.

Entitlement to the state pension depends on paying, or being credited with, the National Insurance contributions (NICs) during working life that you explored in Session 2. Credits are given for certain periods out of work, such as being ill, unemployed or caring for children. Since April 2016 the required contribution record for a full state pension has been 35 years of NICs. A shorter record means a reduced pension.

The key point is that even if you’re entitled to a full state pension, this is highly unlikely to be enough for even a basic lifestyle in retirement. In 2023/24 the full state pension amounted to only £203.85 per week. Those with less than 35 years of NICs get less than this.

The message is clear – the government will provide you with only a limited income once you reach state pension age. You are responsible for organising the additional pension income you need to have a comfortable retirement.