Everything you need to know about the State Pension

Each year, the UK government spends £96 billion on the State Pension. Around 12 million people receive this benefit and, according to Department for Work and Pensions figures, benefit income forms the largest component of total gross income for pensioners.

Even if you have made careful private pension provision, the State Pension can still form an important part of your retirement planning strategy. In this complete guide, find out:

  • How much the State Pension is
  • Its true financial worth
  • How you ensure you receive the maximum State Pension
  • How to claim
  • How you can benefit from a higher State Pension by deferring.

How much is the State Pension?

If you’re a man born after 6 April 1951, or a woman born after 6 April 1953, you can claim the new State Pension when you reach State Pension age.

The full new State Pension is £168.60 per week. Thanks to the so-called ‘triple lock’, it increases each year by the higher of:

  • The percentage growth in prices as measured by the Consumer Prices Index (CPI)
  • The average percentage growth in wages in Great Britain
  • 2.5%

According to Department for Work and Pensions figures, in 2017/18 benefit income was the largest component of total gross income for both pensioner couples and single pensioners.

Benefit income accounted for 59% of the income of single pensioners, and 35% of the income of pensioner couples.

How much is the State Pension worth?

Recent analysis from pension firm Aegon considered the value of the State Pension and the cost of replacing it yourself via an annuity, which would provide guaranteed payments to fund them.

Aegon says it would cost £327,000 to buy the current full State Pension as an annuity for life, increasing in line with inflation.

The company used the Money Advice Service’s Annuity best-buy tables to work out that a pension fund of around £327,000 would be required to create a weekly income of £168.60 for life.

It assumed an individual was living in London and in good health and wanted their income to rise in line with the Retail Price Index inflation measure.

But the firm added: “In practice, State Pensions currently can increase faster than RPI because the triple lock [on annual State Pension increases] is the highest of inflation, earnings growth or 2.5% each year.”

How can I receive the maximum State Pension?

To receive any State Pension, you will normally need at least ten qualifying years on your National Insurance contributions record.

This means for ten years at least one or more of the following applied to you:

  • You were working and paid National Insurance contributions
  • You were getting National Insurance credits (for example, if you were unemployed, ill or a parent or carer)
  • You were paying voluntary National Insurance contributions.

When you’re working, you pay National Insurance and get a qualifying year if:

  • You’re employed and you earn over £166 a week from one employer
  • You’re self-employed and you pay National Insurance contributions.

If you’re not working, you may still receive National Insurance credits; for example, if you couldn’t work because of illness or if you are a carer or unemployed.

You can increase your State Pension by adding more qualifying years to your National Insurance record. You can do this until you reach the full new State Pension amount or reach State Pension age – whichever is first.

You may also be able to pay voluntary National Insurance contributions to increase the amount of State Pension you receive.

How do I claim the State Pension?

It is worth noting that you don’t receive your State Pension automatically once you reach State Pension age. Instead, you have to claim.

You will ordinarily receive a letter no later than two months before you reach State Pension age, telling you what to do. If you do not get an invitation letter, you can still make a claim online, by phone, or by downloading the State Pension claim form and sending it to your local pension centre.

How do I get a higher State Pension by deferring?

If you reach State Pension age and you don’t need to draw your pension immediately, you can defer the receipt of your State Pension and increase the amount you get.

When you reach State Pension age, the amount you receive will increase for every week you defer, provided you defer for at least nine weeks.

Your State Pension increases by the equivalent of 1% for every nine weeks you defer (just under 5.8% for every 52 weeks).

Here’s an example.

  • You receive the full new State Pension of £168.60 a week
  • You decide to defer for 52 weeks
  • You will receive an extra £9.74 a week
  • Your new weekly State Pension will be £178.34.

Of course, there could also be an annual increase in the State Pension and so the amount you could get could be larger.

Get in touch

For many clients, the State Pension is an important part of their retirement planning.

Do you know how to find out what State Pension you are on track for?  It’s easy – simply head online and obtain a forecast.

The website also gives you a breakdown of your NICs so if there are any years that are missed (or look to be incorrect based on your recollections) you may be able to make up the missed years or challenge if you think the records are wrong. Typically, paying for missed years can be quite attractive from an actuarial point of view, so it’s definitely worth considering.

If you would benefit from advice as to how you can fund your lifestyle in later life, please get in touch. Email info@blueskyifas.co.uk or call us on 01189 876655.