What is the State Pension?
Is the State Pension value for money?
Should I top up my State Pension?
Should I defer my State Pension?
It is our belief at Howard Wright that the state pension is a fundamental cornerstone of any retirement or financial plan. In today’s article, we will be looking in detail at the UK state pension.
When will I get my State Pension?
The state pension, as the name suggests is a pension payable from the government once you reach your qualifying age. The qualifying age for the state pension is increasing from 66 as it is currently to 67 between 2026 and 2028 and to 68 between 2044 and 2046.
How much is the State Pension?
For those reaching state pension age after April 2016, the amount that you will receive as a pension is dependent upon how many years of National Insurance credits you have with a maximum state pension from April 2023 of £10,600.20 per year or £203.85 per week. This will increase each year in line with the higher of average wage growth, inflation or 2.5%.
To achieve the full pension you will need 35 years of national insurance credits. If you have less than 10 years of credits you will usually not receive any state pension. If you have between 10-35 years you will usually receive a proportional amount. For example, each qualifying year of national insurance contributions will provide you with approximately £5.82 of state pension per week (£203.85 divided by 35). If you have 20 years of national insurance contributions by the time you reach state pension age, you would receive £116.40 per week or £6,052.80 per year.
The national insurance credits are received when you have earnings above £123 per week if employed, or if you are self employed and pay national insurance. You will also receive credits even if you do not work if you are entitled to and receive certain benefits such as Child Benefit, Jobseekers allowance, carers allowance, working tax credits, maternity / paternity or adoption pay. This list is not comprehensive, if you would like further information please take a look at the following link https://www.gov.uk/national-insurance-credits/eligibility
You can check the number of National insurance qualifying years credited to your name by using the following link https://www.gov.uk/check-state-pension
What if I don’t have enough credits for the full State Pension?
Can I top up my state pension entitlement?
If you have checked your National Insurance credits and find that you are below the 35 credits required for the full state pension you have a couple of options. If the number of years you are short by is less than the number of years until the state pension age and you plan on continuing to work, assuming you earn enough to qualify for the full the National Insurance credit (£123 pounds per week) no further action may be required as you could continue to accumulate credits right up until your state pension age.
If however there are not sufficient working years left until your state pension age to accumulate the full 35 years, or you simply do not wish or need to work then you can top up your state pension voluntarily. You can usually pay voluntary contributions to make up any or all of the past six years of missed contributions. For example, you have until the 5th of April 2024 to make up for gaps back to the 2017/18 tax year. You can sometimes make voluntary contributions for gaps longer than six years ago this is dependent upon your age and it is best to check your ability to do this avoid the link above for checking your National Insurance qualifying years.
Is it value for money to top up my State Pension?
The answer to this question is likely to be dependent upon your personal financial situation however, as a generic answer it is usually good value for money. For the 2023/24 tax year, the cost of completing a full year in your National Insurance record will be £907.40 By making this contribution, assuming you didn’t have the full 35 years of credits, you would increase your state pension entitlement by £302.86 per year. This means that from your state pension age, you would need to live approximately three years to get the purchase price back. As you can see if you live less than three years this is potentially poor value for money, however if you live more than three years not only will you have received your money back you also continue to receive the £303.86 per year plus the annual increases.
Can I work past my state pension age?
If you choose to do so you can continue to work past your state pension age. If you continue to work and your income from all sources is over the personal allowance you will still have to pay income tax. You will however not have to pay any National Insurance on your income once you are over your state pension age. Regardless of if you do or don’t continue to work passed your state pension age, you can still receive your state pension. You can also elect to defer the state pension, which means delaying receiving your benefits until a later date.
Deferred state pension
For those that reach state pension age before the 6th of April 2016, you have two options if deferring your state pension. Firstly for every five weeks that you do not claim your pension from your state pension date, you will increase your entitlement by 1% for every 5 weeks. This means if you defer for five weeks it will increase by 1%, 10 weeks it will increase by 2% and If you defer for 15 weeks it will increase by 3%. This keeps increasing by 1% for every five weeks you defer. The second option you will have is to receive the missed payments as a lump sum once you elect to have the state pension instead of an increased income.
If you reach state pension after the 6th of April 2016 you only have the increased income option. Your state pension in deferment will increase by 1% for every nine weeks that the pension is delayed. This means for the first nine weeks it will increase by 1% for 18 weeks and it will increase by 2% if you defer for 27 weeks it will increase by 3%.
Free Financial Review
As with most things when it comes to your finances what is right for one person may not be right for another as such any and all advice given by Howard Wright is specific to you and your circumstances. If you wish to discuss how your state pension plays a part in your overall financial plan please contact Ashley Smith one of our Chartered Financial Planners at Howard Wright, you can call him on 0345 688 4939 or you can fill in our enquiry form below, it only takes 20 seconds to complete. We look forward to hearing from you and seeing how Ashley can help.
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