Your State Pension may only make up a relatively small portion of your retirement income, but it’s an important part of it, which is why it’s crucial you understand your entitlement.
A recent BBC report revealed that more than 134,000 elderly people have not been paid their full State Pension, something that shows many people don’t know how much they should be receiving.
Read on to discover more about the underpayment and why it’s so important to understand how much State Pension you are entitled to.
More than £1 billion unpaid to pensioners
While the State Pension can seem straightforward, in reality, it can be complex. Despite efforts to simplify the system used, recent reports of pension underpayment to women highlights the importance of making sure you receive the full amount you’re entitled to.
Earlier this year, it was revealed that thousands of women had been underpaid by the government. While the government is correcting the mistake, it could take years to distribute the £1 billion of underpayments, with those affected receiving an average payout of £8,900 each.
The error has mostly affected elderly, widowed or divorced women, due to the complexities around married women claiming a basic State Pension based on their husband’s record of National Insurance contributions (NICs).
While the Department of Work and Pensions have said human error played a role in the mistakes made, the scandal highlights how complicated it can be to calculate how much State Pension you should receive.
So, why do you need to know how much State Pension you’re entitled to?
- Mistakes happen. As the recent underpayment highlights, mistakes do happen. If you understand how the State Pension works, you’re far more likely to notice if errors do occur and ensure these are rectified sooner.
- You may have gaps in your NICs record. How much State Pension you’re entitled to will depend on your NICs. If you have missed some and have gaps in your record for whatever reason, you could be able to fill the gaps. This could increase the amount of State Pension you receive.
- The State Pension provides a reliable income throughout retirement. As a result, it can play a valuable role in your long-term financial plan, by providing security if other income sources are affected by things like investment market volatility.
Understanding the State Pension means you could create a long-term financial plan that helps you reach your retirement goals.
How does the State Pension work?
If you reached the State Pension Age before 6 April 2016, the old State Pension rules will apply. However, most people planning for retirement now will qualify for the “new State Pension”, which aims to make the State Pension simpler.
Under these rules, you need at least 10 qualifying years on your NI record, although they do not need to be consecutive years. To receive the full State Pension of £179.60 each week (£9,339.20 annually) in 2021/22, you’ll need 35 qualifying years on your NI record. If you have between 10 and 35 qualifying years, you’ll receive a proportion of the State Pension.
If you have fewer than 35 years on your NI record, you could buy additional years to increase your State Pension.
In addition to the amount you’re eligible to receive, you need to know when you can claim it. The State Pension Age for men and women has now equalised and is gradually rising. In October 2020, the State Pension Age hit 66 and will reach 67 by 2028. It is being kept under review and could rise further in the future.
To understand what you’re entitled to under the State Pension, you need to know your State Pension Age and how many qualifying years you have on your NI record. The government’s State Pension forecast can help you understand what to expect.
How the State Pension can help you maintain your spending power
While other sources of income in retirement may fluctuate depending on your circumstances or investment performance, your State Pension is valuable because it’s reliable. It also rises each tax year, helping to maintain your spending power.
As the cost of living rises, an income that remains the same will gradually buy less. Over a retirement that could span decades, even small increases in inflation can have an impact on the lifestyle you can afford. So, an income that rises alongside this is important.
Usually, the State Pension annual rise is protected by the triple lock. This means that the State Pension will rise by the highest of:
- Average earnings growth year-on-year for the May–July period
- Inflation in the year to September, measured by the Consumer Price Index
However, average earnings growth will not be included when measuring how the State Pension will increase for the 2022/23 tax year. This is because during the 2020 March–July period, the country was in lockdown due to Covid-19.
Many people experienced reduced wages due to receiving 80% of their usual salary under the Job Retention Scheme when they were unable to work. As the economy began to reopen, this inflated earnings figures and the triple lock meant that pensioners would have received a record 8.8% boost.
The government has argued the earnings growth for this period does not reflect reality and that they will not use this measure when calculating the State Pension increase for the 2022/23 tax year. As a result, the new State Pension will increase by 3.1% for the 2022/23 tax year and pensioners will receive £185.15 a week (£9,627.80 annually).
Get in touch
Making sure you have an adequate pension to maintain your lifestyle in retirement cannot be overstated. Part of that is to understand how much State Pension you are entitled to.
If you would like to discuss how the State Pension dovetails into your retirement goals, or have any questions about your workplace or personal pensions, contact your financial planner directly. Alternatively, contact us using the details below.
This article is for information only. Please do not act solely based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.