Don’t dismiss the State Pension: The UK State Pension Explained

Published on 2nd May 2024

🌤️ Ah, retirement—Having worked hard all of your life, it should be the time when you can finally kick back, enjoy life, and sip tea (or cocktails) whilst watching the world go by. But how are you planning on paying for it?

Yes, it’s true that you should be building your own pension provision and that you shouldn’t just rely on the State Pension. However, it can form a very good base in those later years and so it’s important to know what you may get, how it works once in payment, when you’ll get it, and how you can potentially increase your entitlement.

Spoiler alert – It's just been made a lot easier to top up!

1. What will you get?

• The first thing you should know is that your State Pension amount depends on your National Insurance (NI) record.
• The full rate of the new State Pension is a respectable £221.20 per week and you usually need 35 qualifying years in order to achieve this.
• You require 10 qualifying years on your National Insurance record to get any new State Pension. But what’s a qualifying year?
  • It’s a year in which you were:
    • Working and made sufficient National Insurance contributions.
    • Getting National Insurance credits (for those times when life threw you a curveball—unemployment, illness, or being a superhero parent or carer).
    • Paying voluntary National Insurance contributions (more details on that later).
  • You might also qualify if you’ve lived or worked abroad or paid reduced-rate National Insurance as a married woman.

Factors Affecting Your Pension Amount

• Were you contracted out before 2016? The number of qualifying years you have and whether you paid into the Additional State Pension / State Second Pension before 2016 can impact your pension amount.
• If you’re getting less than £221.20 a week, you might need more qualifying years to increase your State Pension.
• If you paid into the Additional State Pension before 2016 and would have received more under the old rules, you’ll get a ‘protected payment’ on top of the full rate.

2. Does it increase?

• The new State Pension currently increases each year by what is known as the ‘triple lock’, which is the highest of:
  • Earnings: The average percentage growth in UK wages.
  • Prices: The percentage growth in prices in the UK measured by Consumer Prices Index (CPI).
  • A minimum of 2.5%.
• If you have a protected payment, this increases annually in line with CPI.

3. When will you get it?

• If you were born between 6 October 1954 and 5 April 1960, then you’ll be eligible from your 66th Birthday.
• For those born after that, there will be a phased increase in state pension age to 67 by 2028, and then to age 68 by 2046.
• IMPORTANT - the State Pension isn’t paid automatically. You need to claim it!
  • Although you should receive an invite letter around 4 months before you reach state pension age.

4. How can you boost your pension?

• Assuming you don’t already have a full entitlement, you can make voluntary contributions in order to ‘buy additional years’, and each qualifying year which you ‘buy’ should add 1/35th of the full amount to your new State Pension entitlement. As of 2024/25, this translates to approximately £6.32 per week – or over £328 a year.
• Often, the cost of purchasing additional years is less than you may expect, especially if you have already partially contributed in a certain year.
  • Don’t forget, you are purchasing an annual income for life, which currently increases in line with the ‘triple lock’ every year.
• IMPORTANT - You may not need to buy additional qualifying years if you are likely to achieve sufficient credits anyway - perhaps due to the fact you are further away from state pension age and so may 'naturally' plug any gaps in your record due to continually
• Voluntary contributions also don’t always increase your State Pension, especially if you were contracted out or if you’ve already contributed sufficient to achieve your maximum entitlement. This used to mean contacting The Pensions Service directly to check via phone or writing to them to determine your specific position.
• However, just this week (29^th April 2024) the Government has launched a new online service which will allow people under state pension age to view gaps in their national insurance (NI) record and pay voluntary contributions to fill those gaps if it will result in an increase for them. The service will also show people how much their state pension could increase by and details of the voluntary NI contributions they would need to pay to achieve this.
• Eligible individuals have until 5 April 2025 to pay voluntary contributions for gaps between 6 April 2006 and 5 April 2018.
• Starting from 6 April 2025, you can only pay voluntary contributions for the previous 6 tax years.

So how can you do this and get more information?

• You can view your state pension age forecast, a forecast of what you might get, any gaps in your record, and pay voluntary contributions all by visiting Check your State Pension forecast - GOV.UK (www.gov.uk)  or via the HMRC app.

Full state pension currently provides the equivalent of over £950 per month and so forms the foundation of many people’s income in retirement. Make sure you are fully aware of your position and that you factor this into your future plans! You deserve financial peace of mind in your golden years! 🌤️💷

By Nameer Al-Asadi; APFS; Cert CII(MP) – Chartered Financial Planner