Jamie McLaren – Financial Planning Director
Don’t Overlook The UK State Pension
The UK State Pension is paid by the UK Government once an individual has reached their State Pension age. It is a regular income usually paid every four weeks and once in payment, will continue for life. This article focuses on those individuals who have not yet reached their State Pension age.
The value of the ‘full’ entitlement is set at £9,141 p.a. for 2020/21 but before and once in payment, the entitlement increases by the higher of price inflation (Consumer Price Index), average earnings inflation or 2.5% p.a. (these measures are collectively known as the ‘Triple Lock’). While you can defer drawing the State Pension, you are unable to draw it before reaching the State Pension age (SPA).
The Triple Lock has helped increase the ‘real’ value of the State Pension over recent years. However, it has been acknowledged that the generous increase has been at considerable cost to the UK taxpayer and so the Triple Lock is not expected to last indefinitely.
The UK Government has confirmed an increase of 2.5% as of 6 April 2021 (for the 2021/22 tax year), increasing the sum payable to £9,370 p.a. (approximately £180 a week).
However, the State Pension age has also increased over the years, to the point where individuals currently under the age of 60 years will need to wait until they are at least 67 years before it becomes payable.
Even though it may not be payable until individuals reach 67 years, the UK State Pension is still a very valuable source of funds in retirement. It is intended to form a foundation of retirement income which can take the pressure off withdrawals from other pension/non-pension arrangements and, as it is a defined income, is guaranteed for life.
You are not automatically entitled to the full State Pension. An individual’s entitlement depends on their National Insurance (NI) record. The State Pension was changed on 6 April 2016 to a new ‘single-tier’ system and accrual after this date would require 35 years of qualifying NI contributions or credits. NI is paid naturally via employment (so long as earnings are above £6,240 in 2020/21) and via self-employment (so long as Class 2 NI contributions are paid). You can also increase your State Pension entitlement via NI credits when not working (e.g. via certain State benefits). If still short of the full entitlement, individuals can choose to pay voluntary NI contributions to top up their entitlement.
There was a conversion of State Pension benefits accrued before 6 April 2016 and so some individuals may require more than the 35 years (with others requiring less).
State Pension entitlement is assessed as part of the Murray Asset Management annual Financial Planning review.
You can find out your State Pension age using the gov.uk calculator.