November last year was an interesting month for State Pensions; it was the month when the state pension age started to change from age 65 to 66, phased in over 2 years. A survey by Censuswide of 1k people found that:
14% of UK adults think the State pension will not exist when they retire
29% of 18–34yr olds think the State pension will not exist when they retire
32% think it will exist but provide negligible income
21% think it will be means tested
Canada Life also did a recent survey, which showed that most UK adults expect to receive an average State Pension of £150 per week.
So, what is the truth behind State pensions? Will they exist and will they be worth having?
After the increase in retirement age in November 2018, it will stay at age 66 until 2026, when it will be phased into 67 in 2028. It will remain at age 67 until 2044 when, again over a two-year period, it will be phased into age 68.
We can, therefore, be confident that the State Pension will remain.
How much will it be worth? There were major changes made in April 2016. Previously we benefited from the basic State Pension and a top up known as the Additional State Pension. Many people of a certain age will think of this as SERPS, the State Earnings Related Pension, however, this has had several changes since 2002.
To qualify for the full basic State Pension you need to contribute for 30 years.
Post-April 2016, you would benefit from a fixed rate pension of £165.35 per week (in current values) but to benefit from the full amount you will need to have contributed for 35 years and if contributions were for less than 10 years you will not qualify at all.
The next question clients ask, after learning this, is if I had accumulated state pensions in excess of the £165.35, will I lose out?
The good news is, probably not. Those who had not reached State Pension age before 6 April 2016 will have a starting amount (known as a foundation amount) calculated. This amount was calculated as at 5 April 2016 and will be the higher of either:
The amount they would get under the pre-6 April 2016 rules (which includes basic State Pension and Additional State Pension or
The amount they would get if the new State Pension had been in place at the start of their working life
So, we can be assured that, so long as we contribute the full 35 years, we will still get a State Pension of at least £165.35 per week, but is this really a lot?
This State Pension will increase every year by what is known as the triple lock. Each year this value will increase by either average earnings, consumer price index or 2.5%, whichever is the greatest. We will, therefore, benefit from £8,598.20 per year increasing by at least 2.5%. This is a valuable benefit.
We would need to accumulate
£232,000 in a personal pension
to provide benefits similar to
the State Pension.
For those of us not lucky enough to have a defined benefit pension we would need to accumulate a fund of approximately £232,000 in a personal pension to provide similar benefits to those provided by the State. (Source: Institute and Faculty of Actuaries’ Continuous Mortality Investigation (CMI) data).
I think you will agree that that is a lot of money and the, therefore, state pension is actually very valuable!
Of course, as with everything in life, there is a risk attached to this.
There is always the risk of changes to legislation however regularly reviewing your state pension with your financial planner will enable you to keep up to date with any government tinkering.
There is a risk that you will not qualify for the full pension because you have not made enough contributions. You can obtain details of your contribution history by logging onto https://www.gov.uk/check-state-pension or completing a BR19 which can be downloaded from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/761746/br19-print.pdf
If you are short of qualifying years, you can make voluntary national insurance contributions (class III) and this is a fantastic investment opportunity!
To make up for one lost year of contributions would cost you £762.80 (£14 .65×52). This buys you 1/35 of the state pension (£8,546 per annum) which is £244.17, payable every year for life. Don’t forget this also increases under the triple lock rules.
You will not get such good returns by investing in a personal pension!
Warning: don’t overpay as you will not increase your benefits for more than 35 years contributions.
If you would like to talk to us about your State Pension entitlement or indeed any other pension or personal finance query please get in touch on 01661 860438 or firstname.lastname@example.org
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