10th October 2018 at 12:00pm
The State Pension has gone through big changes in recent years. Getting to grips with what you can expect from it and when, and building this into your wider life savings plan, can help you make the most of life after work.
We help explain how the State Pension works and what it means for you.
What is State Pension and how does it work?
When you reach a certain age (more on this below) the Government will make payments to you each month. A flat-rate new State Pension was introduced in April 2016 to try to simplify things, although the older Basic State Pension is still around for those already getting it.
To qualify for some State Pension, you must have at least 10 ‘qualifying years’. A qualifying year is usually achieved by paying National Insurance (NI) contributions while you are working, but you could also get credited with years while you’re not employed or have low earnings.
How is it different from a personal or workplace pension?
Some people can get a bit confused about this. A workplace pension is one offered by your employer and a personal pension is one you set up yourself. You decide how much you put into these to help you save enough to retire when you want to. As contributions are invested, the value of these types of pensions can go down as well as up and could be worth less than was paid in.
You can normally start to take money from your own savings in a private or workplace pension from the age of 55, though this could change in the future.
To find out more about the potential benefits of a workplace or personal pension, read What’s so good about a pension?
How much will I get from my State Pension?
Although it’s referred to as a flat-rate State Pension, not everyone gets the same. How much will depend on when you start claiming and your NI record.
To get the full amount, currently £164.35 a week, you need to have paid or been credited with at least 35 qualifying years of NI contributions.
Are there any reasons why I might not get what I expect?
It’s really important to check if you were a member of a ‘contracted-out’ pension scheme.
People contracted-out when they joined a work or personal pension scheme. It meant they built up benefits in private pensions, instead of the State Pension. They also paid lower NI contributions.
Often they don’t know what this means or how it can impact their State Pension and it’s important to check with your pension provider if you’ve been contracted out as it could mean you get less than you expect. If you have lost your provider’s details The Pension Tracing Service might be able to help.
I have gaps in employment…
Many of us have gaps in our working history – perhaps during a period of self-employment or while raising a family.
In some cases this gap can be bridged if you claim certain benefits, for example, jobseeker’s allowance or child benefit.
Our recent article covers how claiming child benefit can help you build your State Pension.
‘Topping up’ contributions
You can top up your NI contributions. You’ll have to balance the cost of this now with the benefit of getting a bigger State Pension at retirement.
When will I get the State Pension and is this changing?
You can calculate this using the State Pension calculator. It is worked out based on your date of birth and gender – although in future it will be the same for men and women.
From 2019, the State Pension age will increase for both men and women to reach 66 by October 2020.
Could State Pension age go higher still?
Standard Life Head of Pensions Strategy, Jamie Jenkins, says: “Looking ahead, it’s not difficult to see that future generations may need to wait until they are 70 or more before claiming their entitlement from the State.”
What if I don’t want to work until then?
If you want to retire earlier than your State Pension age – and from surveys we know many people want to retire well before State Pension age – that’s where your own life savings can make all the difference.
Upping contributions to your workplace or private pension just a little could make a big difference in the long run. You also have more choice and flexibility when it comes to taking your life savings, which you usually can from age 55.
Check if your own life savings are on track – including the contribution made by the State Pension – using our pension calculator.
Will State Pension be enough?
While it can help your retirement plans, the basic State Pension is less than a minimum wage salary.
Everyone should make the most of their State Pension but it’s unlikely that they’ll be able to rely on it to provide the lifestyle they want, especially if they plan to retire earlier than their late 60s.
Jamie Jenkins adds: “Taking control of saving for your later years means you will have more control over the age you retire in the future, and will have less reliance on predicting what will happen next with the State Pension.”
What you can do?
If you can take extra steps to boost your retirement income now, like increasing contributions to a private or workplace pension, your future self will very likely thank you.
Personal and workplace pensions are investments and their value can go down as well as up and may be worth less than was paid in. Tax and legislation may change and the information here is based on our understanding in October 2018 and shouldn’t be taken as financial advice.