The answer very simply is that the State Pension alone is not enough! For most of us, the State Pension is the valuable foundation which underpins our retirement income. On its own, according to most cost of living figures, the state pension alone does not adequately provide for a reasonable standard of living in retirement. In fact, living on the basic state pension income alone would be defined by most measures as ‘living in poverty’.
Many of us are fortunate to be able to supplement our State Pension income in retirement, with work or private pension scheme income or with income from savings and investments. The evidence is clear that nowadays building up your own pension pot for retirement is an absolute must – ideally starting at the same time as you start work.
If you work, you’re required to contribute to the State Pension Scheme, and if you don’t work, you might be making voluntary contributions, or being credited as though you were contributing.
There are two parts to the state pension – the basic state pension, which almost everyone gets, and the additional state pension, which is only for employees. You qualify for the basic state pension by reaching state pension age and making 30 years’ worth of National Insurance contributions. The basic state pension is currently worth £113.10 a week for a single person in 2014/15 (or £5,881 a year).
If you’re married, and both you and your partner have built up state pension, you’ll get double this amount – so £226.20 a week. But if your partner has not built up their own state pension, they’ll still be able to claim a state pension based on your record. If your income is below a certain level, you can boost it by claiming Pension Credit. This will take your income up to £148.35 a week for a single person and £226.50 a week for a couple (in 2014/15). This would give you £11,778 p.a in retirement – below what many believe is the minimum income for a reasonable standard of living in retirement for a couple. The Joseph Rowntree Foundation estimate that the minimum amount to achieve this ‘reasonable standard’ is £13,600 p.a.
In April 2014, it was announced that those retiring before April 2016 will be able to gain additional state pension by paying so-called Class 3A voluntary National Insurance contributions between October 2015 and April 2017. To increase your state pension by £1 per week will cost £890 if you are 65 years old. The maximum you can top up your pension by is £25 per week, which would cost £22,250 at age 65. The cost of topping up falls as your age increases, so for a 70 year old an extra £1 per week costs £779, for a 75 year old it’s £674 and for someone aged 80 it costs £544.
You may also qualify for the additional state pension, also known as State Earnings Related Pension Scheme (SERPS) or state second pension (S2P). The additional pension is based on your earnings. The maximum you could claim in 2013/14 was £163 a week on top of your basic state pension – taking your total to £273.15 a week. Most people opted, or ‘contracted’, out of the additional state pension at some point in their working lives.
There are also State Pension reforms in the pipeline to bear in mind when calculating how much it will contribute towards your retirement. The basic and additional state pensions are going to be replaced by one flat-rate state pension, worth £144 a week in today’s money, from April 2016. The additional pension and ‘contracting out’ will be abolished, and so will part of pension credit. Qualifying National Insurance years will also increase from 30 to 35 years.
This will be good news for the self-employed who don’t currently qualify for second state pension, and for some women, who may have gaps in their National Insurance records from caring for children – they will receive more state pension. But some people, like public sector workers in contracted out defined benefit or final salary schemes, will see their National Insurance contributions rise – effectively meaning a pay cut for them.
If you would like any further advice or would like to discuss your options in more detail, please contact your Cullen Wealth Consultant.
Sources: www.which.co.uk (Published guidance notes: January 2015)