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 our financial planning team here at Vesta Wealth in Cumbria, Teesside and across the North of England.
In late May 2020 The Telegraph ran a concerning headline titled: ‘Only four in 10 retirees get the full state pension’. Briefly, the Government had published some new figures showing that, since 2016, only 44% of people over the state pension age were receiving the full state pension. Here at Vesta Wealth we wanted to offer some thoughts to help ensure our clients know how to get the best deal out of the UK state pension to benefit their retirement.
Find our thoughts below. We hope you find this content useful. To discuss your own financial plan, feel free to get in touch:
t: 01228 210 137
e: [email protected]
Why are some people missing out?
In 2020-21, the UK pension system entitles a person to the new state pension once they reach their state pension age (i.e. 66 for men and women from October 2020, rising in the future). To be entitled to the full new state pension of £175.20 per week, which amounts to £9,110.40 per year, you need to accrue at least 35 qualifying years of national insurance contributions (NICs). To receive any state pension income at all when you retire, you need at least 10 qualifying years of NICs.
This begs the question, why are so many people missing out on this £9,110.40 per year? The UK government’s figures even suggest that about 608,000 people receive 75-100% of the full new state pension, whilst 109,000 receive less than 75%. In short, those receiving less than the 100% they could have received did not accrue sufficient qualifying years of NICs on their record.
The picture is furthermore complicated by the significant change to the UK pension system on the 6th of April 2016. At this point, many people were part of a defined benefit pension scheme and were ‘contracted out’ of their old additional state pension. Those who made this decision thus had no further time to build their national insurance (NI) record, thus accruing the qualifying years of NICs they might have needed to attain the 35 qualifying years required for the full new state pension.
For those unsure as to whether or not they were ‘contracted out’, our financial advisers here at InvestAcc can help you ascertain the information you need about your pension(s). It might be possible to check some of this yourself. If you still have your payslips from the past 5 years or so, then look for the letters next to the line showing your NI contributions. If there is an ‘A’ then you likely paid your full contribution; if there is a ‘D’ or ’N’ then you were almost certainly contracted out.
How to attain a complete NIC record
If you are approaching retirement (or even earlier on in your career), then there are options open to increase your future state pension income. It might be, for instance, that you are not on track to attain the full 35 qualifying years of NICs before you hope to retire. In which case, here are some ideas to consider with your financial adviser.
First, there might be scope to make voluntary national insurance contributions (VNICs) to ‘top up’ some of the previous 7 years which did not quite qualify. For instance, suppose you fell £500 short of attaining a qualifying year in 2018-19. Paying that £500 now into the system, voluntarily, could help provide a higher, steady income in retirement for many years.
Another option is to simply delay retirement. If, say, you had hoped to retire at 66 in October 2020-21, have no opportunity to make VNICs to ‘top up’ your record and are happy to delay retirement for a few years, then these extra years of NICs built up through your employment could enable you to achieve the full 35 qualifying years which you need. Remember, you do not automatically ‘get’ your state pension once you reach your state pension age; you need to ‘claim’ it. As such, automatically deferring the claim of your state pension could be a viable way to increase your weekly payments when you do eventually decide to claim it.
One final option to consider with your financial adviser is to find out if you are eligible for national insurance credits. This offers a way for people to increase their state pension income if they found themselves in a position where they could not viably make NICs (e.g. those on maternity leave, on sick pay or on Jobseeker’s Allowance). There are different kinds of credits on offer, depending on your situation. Someone on Maternity Allowance, for instance, should automatically get Class 1 credits whilst parents registered for Child Benefit for a child under 12 automatically get Class 3 credits.
Conclusion
If you are interested in discussing your financial plan, please get in touch with your financial adviser at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]