Articles - State Pensions are they a Good Deal


We already know which one of a group of celebrities who had voluntarily given up all luxuries and agreed to subsist on a primary diet of rice and beans (plus other unmentionables) has been crowned Queen, or King, of the jungle. The fact is though that, win or lose, those lucky individuals have been able to get back to their former lifestyles and treat that period as an enjoyable memory. Not so those who have just retired with the State Pension as their main, and in some cases only, source of income.

 By Fiona Tait, Technical Director, Intelligent Pensions

 Royal London’s recent ‘State Pension Challenge’ found that people think that they need, on average, £1,117 per month to live on, whereas the State Pension currently pays £802 (this is before the next increase in line with the ‘triple lock’ – more of that later) .

 To quote Royal London’s Consumer Finance Specialist, Sarah Pennells: “While it was possible to pay for everyday items, such as food, there was no money left over for unexpected bills. The State Pension is the foundation of most peoples’ income in retirement, but it is highly unlikely to pay enough for the life you’d like in retirement.”

 This leaves in no doubt the fact that the State Pension is not enough to support any level of comfort in retirement – but then it is not intended to. When the government introduced the new State Pension (nSP) they made it clear that the aim was to provide a basic standard of living, based on a full working life. There are of course many individuals with gaps in their National Insurance (NI) record who will not be eligible to receive £802 per month and who should perhaps consider topping up their entitlement. £802 per month may not be a huge amount but it is certainly better than nothing, and unlike many private pensions the income is guaranteed to be paid for life.

 Good value
 The main reason the State Pension is good value is that it is fully inflation proofed, a fact which was underlined by Jeremy Hunt’s recent confirmation that the ‘triple lock’ will be maintained in 2023. This means that pensioners will receive an increase of 10.1% in April which is well above the likely increases for those still in employment.

 For those that think this is unfair, it should be remembered that once the increase has been implemented it will form the bedrock for the future State Pension, and so younger people can expect to benefit from a higher initial income when they reach State Pension age (SPa). There are 2 problems with this – firstly that younger people may have to wait a lot longer before they do reach SPa, and secondly there is no guarantee that the State Pension will exist in it’s current form, or indeed at all, when the Millenial and ‘zoomer’ generations come to retire.

 The next review into the SPa is due by May of next year and speculation is rife as to whether we will see the rise to age 68 being brought forward from 2044-2046. At the same time, many commentators have stated that the State Pension is increasingly unsustainable and that further changes will be required.

 Be that as it may, any changes will almost certainly not effect entitlements built up to date and so there is still an argument for taking action to ensure members and clients maximise their current entitlement.

 Buy now while stocks last
 Under current rules it takes 35 years of NI contributions to build up the full State Pension entitlement. Those with gaps in their NI records are however permitted to pay voluntary contributions to ‘fill them up’. This is normally only applicable to gap the previous 6 years, however there is currently a ‘buy now while stocks last’ opportunity for men born after 5 April 1951, and women born after 5 April 1953 to go back up to 16 years.

 This opportunity will come to an end on 5 April 2023 and may be particularly relevent to the younger baby boomers who may not have time to build up any significant workplace pension savings, and to women who expected to rely on their husband’s NI record and now find that their new State Pension entitlement is much less than they hoped.

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