Your guide to understanding the State Pension
Most of us wouldn’t dream of going on holiday without making a few plans and checking out hotels, flight costs and setting aside a rough budget. So, why should it be any different with retirement, ‘life’s longest holiday’?
The State Pension acts as a bedrock for retirement income for many people – so it’s a good idea to work out when you’re entitled to it, what you’re going to get and whether it’s actually enough for you to live on.
Hint: The key thing to remember is that not everyone gets the current full new State Pension of £179.60 a week, which is payable once you reach the State Pension age1. There are a few reasons for this, which we’ll cover off.
When will I receive the State Pension?
You can claim it from when you reach your State Pension age, currently this is age 662. It’s likely to be different to the age you can access a workplace or personal pension.
You should know that the State Pension age is gradually going up. It rises to age 67 progressively between 2026 and 2028, and another rise increasing it to age 68 is due to be phased in between 2044 and 20462.
There’s an intention to bring the increase to age 68 forward to between 2037 and 2039, but this must be first agreed by Parliament2.
How much money from the State Pension will I get?
Your State Pension is based on how many qualifying years of National Insurance contributions (NICs) you have, including NI credits. National Insurance contributions are deducted from your earnings once you earn above a certain level in a week. You can also build up NI credits for time spent out of the workplace, for example if you’re a carer.
To receive the full new State Pension, you need to have built up at least 35 qualifying years of NICs or NI credits. If you have at least 10 but less than 35 qualifying years, you’ll be eligible to receive a reduced State Pension. Having more than 35 qualifying years of NICS or NI credits won’t increase it3.
The State Pension system was revamped on 6 April 20164. Those reaching State Pension age after this date will receive the new State Pension which may be affected by complex transitional rules, designed to make sure no-one loses out by getting less under the new rules than they were entitled to under the old ones.
Everyone with an NIC record at 6 April 2016 is given a one-off starting amount, where the old State Pension rules are compared to the new rules and you’re entitled to the higher amount. If you were contracted-out of the earnings-related Additional State Pension under the old rules, this will have been accounted for when calculating your starting amount.
What’s the triple lock?
The new State Pension normally increases in line with the triple lock. This is the government’s guarantee that the new State Pension will increase by the higher of average earnings, the consumer price index (CPI) or 2.5%. However, the triple lock has been suspended for one year from April 2022. This is due to the distortion to the earnings statistics relating to the pandemic and the reopening of the economy.
Instead, the new State Pension will be increased in line with a temporary double lock, the higher of the increase in the September CPI or 2.5%. The government has confirmed that using the September RPI increase of 3.1% the new State Pension will increase to £185.15 a week from 6 April 20225.
You can find out your State Pension age and get a State Pension forecast by visiting the government’s website.
Can I increase my State Pension entitlement if I need to?
If you don’t have a full National Insurance contributions record – for example, because there are years when you’ve earned no or low income, were self-employed and didn’t pay NICs or were living abroad – you can increase your State Pension entitlement by making additional voluntary National Insurance contributions.
Deferring your State Pension
When you reach your State Pension age, you don't have to claim your State Pension straight away. Deferring can qualify you for higher payments when you do decide to start taking it. So, if you’re thinking about phasing in retirement, or plan to work on past retirement age, this might be an option for you to consider.
Is it enough for me to live on in retirement?
Depending on what type of retirement you want to have and what outgoings you’ll need to account for, it rarely makes sense to rely entirely on the State Pension if you can avoid it. It’s more likely to just about cover the basics of living.
A private pension is worth considering and the earlier you start saving, either in a workplace or personal pension, the longer your investments could have the chance to grow. Keep in mind that investments can go up as well as down and that you could get back less than you put in. And of course, if you want to retire before State Pension age, that needs careful planning too and probably extra saving. Having a private pension(s) gives you more flexibility – remember – it’s not possible to receive your State Pension early.
Ok, what should I do now?
Once you know how much State Pension you’re likely to get and when – make a list of all things you enjoy and want to continue doing in retirement. Think things like nice holidays, gifts to your children, running a car, going out to concerts or eating in a restaurant. This will give you some idea of the level of income you’ll need in retirement.
As a general rule, it’s often said that you should aim to contribute a percentage of your salary each month equivalent to half your age when you first started a pension. Of course, if you have a workplace pension, your employer will contribute as well. Don’t worry if you can’t manage such a big chunk of your salary – even a small amount can play its part in helping towards the goal of financial choices come retirement
For more articles like these, you can visit our Customer Perspectives hub. This article isn’t intended as financial advice. If you're unsure what to do or you need advice, please speak to a financial adviser. You can find a financial adviser near you at MoneyHelper.
- The new State Pension – what you’ll get. Data source, GOV.UK, January 2022.
- Second State Pension Age Review launches. Data source, GOV.UK, December 2021.
- The new State Pension – your National Insurance record and your State Pension. Data source, GOV.UK, January 2022.
- The new State Pension – eligibility. Data source, GOV.UK, January 2022.
- State Pension and benefit rates for 2022 to 2023 confirmed. Data source, GOV.UK, November 2021.