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Retirement planning made easy
Retirement planning made easy

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3 Your state pension

The role of the state pension is to provide a basic level of income. Recently the age you can start to receive it has risen, as people’s life expectancy has been rising.

The figure is a photo of two women painting.
Figure 3 With retirement comes more time to pursue your hobbies.

Since April 2016 those reaching state pension age receive the ‘new’ state pension, also known as the ‘flat-rate’ state pension – this is different to the ‘old’ basic state pension paid to people retiring before 6 April 2016. The term ‘flat-rate’ is a bit misleading as the amount of pension you get depends on your lifetime record of National Insurance Contributions (NICs). Those with at least 35 years of contributions get the full amount of £203.85 per week in 2023/24 (£10,600.20 for the year).

Those with fewer than 35 years of contributions get a reduced amount of state pension and those with fewer than 10 years of contributions won’t qualify.

On the other hand, many people will get more than just the flat-rate because of transitional rules which mean that any state pension in excess of the flat-rate built up under the ‘old’ state pension scheme (before 6 April 2016) is preserved as a ‘protected payment’.

In the next activity, you can find out how much state pension you are on track to receive and the age you can get it.

Activity 2 Your state pension

Timing: Allow approximately 10 minutes for this activity

Use this link to access you state pension age and your state pension forecast. Remember to open the link in a new tab or window so that you can easily return to the course.

Check your state pension [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]

Note down the details.

Is your forecast state pension more or less than you expected?

To use this interactive functionality a free OU account is required. Sign in or register.
Interactive feature not available in single page view (see it in standard view).

Discussion

Was your figure as expected? If your estimated pension was lower than expected this may be because you used to be ‘contracted out’ of part of the old state pension – this means you’ll get some of your pension from an occupational or personal pension instead. Perhaps you have a reduced record as you spent time out of employment? You can receive credits for these periods when you did not work, including time spent looking after your children. If you have any doubts check your NIC record. You should check and challenge any errors you think there are. You can also look at how you can voluntarily top up your NICs if you want to boost your state pension.

Check your national insurance record (open the link in a new tab or window so that you can easily return to the course)

On the other hand, maybe your statement shows that you’ll get more than the full flat-rate pension. This is likely to be because you built up a higher entitlement under the old pre-2016 state pension system. You’ll still get this ‘protected’ extra sum when your new state pension starts.

Some important points to remember:

  • State pensions are currently increased every year in April. The increase in recent years has been based on the highest of three measures: the rate of inflation, the rate of average earnings growth, or a 2.5% increase. This way of setting the annual increase is known as the ‘triple lock’. This arrangement may change in the future as it has been criticised for being too expensive for the government, particularly at times of high price or earnings inflation. Indeed, for 2023/24 the application of the triple lock combined with the sharp increase in the rate of inflation in the UK resulted in a 10.1% increase in state pensions.
  • You don’t have to take your state pension from the point that you qualify – you can delay this. You’ll receive an extra 1% on your pension payment for each 9 weeks of deferral. So, not taking your state pension for a year will add 5.8% to what you receive – £11.82 a week currently for those on the full new state pension. If you are not planning to retire fully until later, it may make sense to delay taking your state pension. A link to finding more about this is provided at the end of the course.
  • The government provides a safety net for those who don’t have enough income in retirement. This is called Pension Credit, and entitlement to it also enables you to obtain other state benefits. If you are retired and your total income is low, you should find out more about pension credit via the link provided at the end of the course. Don’t miss out – there’s an estimated 1 million households in the UK who are entitled to pension credit but don’t claim it (DWP, 2020).
  • Your state pension is taxable and will be included in HMRC’s calculation of the income tax you need to pay in the tax year. However, you stop paying National Insurance when you reach state pension age.
  • People receiving the state pensions also get an annual winter fuel payment – currently £200, or £300 for those aged 80 years or over. These amounts are lower if other members of the household are eligible for the payment (or if the recipient is living in a care home). For 2022/23 this fuel allowance was boosted by £300 as a result of the sharp increase in energy prices seen since 2021. The same £300 boost is planned for 2023/24. There’s also a Christmas bonus (currently £10). These allowances are tax-free.

While the state pension may be a large part of the income you require in retirement, it is unlikely to give you enough to cover much more than the basic minimum living costs. The state pension for two people currently amounts to £21,200.40 for 2023/24. This is much lower than the estimated minimum a couple needs to spend for a moderate lifestyle in retirement (£34,000) mentioned in the previous section.

So now it’s time for you to look at what additional pension income you can expect from your own ‘private’ pension savings, whether they are personal or occupational pensions, provided through your workplace or arranged by yourself.