In 2019-20, the maximum new state pension amounts to about £8,767.20 per year (£168.60 a week) – quite a significant sum towards helping fund your retirement lifestyle.
Of course, it’s easy to assume that you will get the same amount from the government as everyone else when you retire. Yet this is not necessarily the case.
How much you eventually receive will depend on a range of factors, especially how long you have been paying into the system throughout your career.
In this guide, we’ve compiled a list of 4 crucial questions you should ask yourself about your state pension, when trying to work out what your income will be in retirement.
We hope you find this guide helpful, and invite you to get in touch to discuss your financial situation with a financial adviser here at Cedar House if you would like further assistance. Please note that this content is for information purposes only, and should not be taken as financial advice.
#1 Do I qualify for a state pension?
This is the first crucial question, as not everyone will be entitled to a pension income from the government. In particular, the rules in 2019-20 state that you must have made a minimum of 10 “qualifying years” of National Insurance (NI) contributions to receive anything at all.
You can check how many years of contributions you have accumulated by checking your personal record on the HMRC website.
What counts as a “qualifying year” of NI can be somewhat confusing, but in general, you can earn one via:
- Payment of voluntary NI contributions (e.g. during financial years when you have taken a career break, perhaps due to moving overseas).
- Payment of NI contributions during employment. If you are employed, then all of this will likely have been sorted out on your behalf by your employer, using the Pay-As-You-Earn system (PAYE).
- Receipt of NI credits during sickness, unemployment or parental leave.
#2 When will I qualify for the state pension?
When you ask yourself: “When will I retire?”, the answer can be confusing due to the Pension Freedoms which were introduced in 2015.
These changes allow most people to access their private pensions and workplace pensions from the age of 55. The state pension, however, cannot be accessed until you reach your “state pension age”, which will depend mostly on your age.
For men and women, the state pension age rose to 65 in 2018. Going forwards it will eventually rise to 67 in 2028 and could rise again in the future.
You can check your own state pension age using the government’s state pension calculator tool.
#3 How much state pension will I get?
You might think that the answer to this simply lies in tallying up your total qualifying years of NI contributions, but unfortunately, it is more complicated than that.
The pension system in the UK is unfortunately quite complicated, and various attempts at reform have been made in order to simplify it. Yet for the moment, we all need to work within its maze and find the specific answer to our own situation. Working with a financial adviser can really help you in this respect.
As a starting point, you do need to tally your qualifying years of NI contributions and ensure they exceed at least 10 years (to ensure you get a state pension at all). Then, determine your state pension age using the tool mentioned above.
From here, you need to work out: did you reach the state pension age before 6 April 2016? If so, then the new pension rules do not directly affect you. In this case, the basic state pension in 2019-20 is £129.20 per week and you might even have built up some additional state pension.
If you qualified on or after 6 April 2016, then the “full” new state pension is £168.60 per week. Yet you could end up receiving less than this amount, or more, depending on certain situations including (but not limited to):
- You paid less NI for a number of years (i.e. due to “contracting out”); in which case, you will probably get less.
- You built up additional state pension and made full NI contributions, meaning you will likely get more than £168.60 per week.
#4 How can I increase my state pension?
You need a minimum of 35 years of qualifying NI contributions in 2019-20, in order to receive the £168.60 per week offered under the new state pension. So, if you are short of that figure then one way to boost your state pension is to consider adding more years to your NI record.
For instance, suppose that you are in your late 30s and you took a career break a few years ago to spend more time at home raising your family. You have 5 years of qualifying NI contributions under your belt, which means that you need to build up another 30 years to one day be entitled to your own full new state pension of £168.60 per week.
Looking forward, you realise that you might not have enough time to build up those 30 years when you eventually return to work. So, what could you do?
Speaking with a financial adviser, you realise that within the last 6 years you did not build up full, qualifying years on your NI record. During some years, moreover, you were just short. By making Voluntary National Insurance contributions to plug these gaps in your record, therefore, you can give yourself more “breathing space” when building up your NI record in the future when you do eventually return to work.