The State Pension is one of the most important aspects to most individuals’ retirement plans. Not only does it provide a guaranteed future income for the rest of your life, but it also rises each year by at least 2.5% (to ensure it keeps up with the cost of living). However, getting the full new State Pension relies upon your National Insurance Contribution (NIC) record – requiring at least 35 “qualifying years”. If you do not have this, then one option might be to defer your State Pension. In this article, our financial planners explain how State Pension deferral works, when this can be a good option and what other strategies can help to boost retirement income.
The State Pension, explained
In order to receive any State Pension at all, you need at least 10 qualifying years on your NIC record. Most people build up these qualifying years automatically via their employment, under the UK’s enrolment rules (which are dealt with by your employer via PAYE). As such, if you have worked for one or more British employers throughout your career, you are likely on track to get the full new State Pension as you head towards the 35-year goalpost.
However, if you have been overseas for a significant period or out of work for some time (e.g. to care for dependents), then you may have gaps in your NIC record. If you are unsure, then you can always check your record quickly, and for free, using the UK government’s portal, here. For instance, perhaps you have 29 qualifying years on your record – meaning you need 6 more to get the full new State Pension.
How deferral works
Those with an incomplete NIC record might consider deferring their State Pension to increase their retirement income. Remember, to get your State Pension you must reach your State Pension Age (which is 66 in 2021-22, but it depends on when you were born) and then you must claim your State Pension – it is not given to you automatically. Most people will get a letter from the government about 2 months before they reach State Pension Age, telling them they will soon become eligible. However, this letter does not always arrive, so keep an eye out!
If you decide to take your State Pension from this point, then your weekly income will be based on the NIC record you built up over your life. However, if you choose to defer taking it, then this can help build up the payments you eventually receive. You do not need to do anything to defer your State Pension – just not claim it.
Every week you defer will gradually grow your eventual new State Pension income (on condition that you defer for at least 9 weeks). Every 9 weeks your payments will increase by 1%, which adds up to 5.8% if done for a full 52 weeks. For example, if you already built up your full new State Pension but decided to work a bit longer past your State Pension Age, then by week 52 your £179.60 weekly entitlement should add about £10.42 to the payments if you decided to then start claiming it.
Should I defer my State Pension?
The answer to this question hinges on two other ones: when do you wish to retire and how much do you need to support your lifestyle? If, for instance, you are determined to start your retirement at 66 (this year’s State Pension Age) then the question is whether you can afford it. In some cases, taking a lower State Pension income can be viable if you have other pensions and assets to draw from, such as Buy-to-Let rental income and workplace pensions.
However, your financial planner may advise you that your desired retirement lifestyle is not feasible. In which case, you might need to lower your planned expenditure e.g. take fewer holidays, fewer meals out and/or not buying a new car as often. Alternatively, for those happy about working for a bit longer (e.g. 1-3 years after their State Pension age), then deferring a State Pension can be a good option – helping you to build up the income you need.
Bear in mind that deferral is not the only option for those with an incomplete NIC record. One other idea to consider is making voluntary NI contributions. Here, you look through your NIC record and identify gaps that could be topped up with a contribution, now. Usually, you can do this for the last 6 tax years. The cost will vary depending on the tax year and the type of NI contributions in question. However, to give an idea of costs, in 2021-22 the rates are £15.40 a week for Class 3 contributions. For a full 52-week year, therefore, you could pay about £800. Whether this is a good idea will depend on a number of factors, particularly how long you are likely to live; those in poor health are less likely to benefit from the increase in pension.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
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t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.