The UK State Pension is often overlooked as a reliable source of retirement income, largely due to the fear the Government will remove the benefit, or continue to push back the years until retirees reach the State Pension age. We know that from April 2023 the State Pension is set to rise by 10.1%, with the UK Government honouring the triple lock rules for 22/23. Pleasingly this means the UK full State Pension will pay £10,600.21 a year from 6th April.
We deem the UK State Pension a valuable asset, given the current triple lock system for annualised growth, and the scheme guarantee
as an income source to pay towards your essential outgoings. With this in mind we suggest all UK residents check their National Insurance Contribution history to ensure they are on track for a full 35 years of contributions before their target retirement age.
As per the new State Pension rules you must have a minimum of 10 years contributions to receive a State Pension. In April 2023 a retiree with 10 of the 35 years will get a proportional State Pension of £3,028.63. Versus a retiree with 9 years who would not qualify for any income.
Until April 2023 you can buy back National Insurance years to 2006. This gives a huge opportunity to maximise your State Pension benefit before the rules change. After 6th April 2023 you are capped at buying back six years. Considering this, we urge investors to check their National Insurance history. If you have gaps between 2006 and 2017, it would be worth plugging these now.
The process of buying a year’s State Pension input is to make a Class 3 National Insurance contribution (NIC), often referred to as a voluntary contribution. The weekly cost for a Class 3 contribution is £15.85, or £824.20 a year. From April 2023 the Class 3 rate is rising by £1.60 a week to £17.45, making the annual cost £907.40. For a saver looking to buy back five years this is an additional cost of £416.
Applying this to an example, let’s assume you are 65 and approaching State Pension age. You are retired; therefore have no more Class 2 or 4 contributions to collect via PAYE. You have a 30 year NIC record, and thus a partial State Pension. The State Pension you’d receive using the 23/24 rates would be £9,085.89 per annum. The cost for you buying the five missing years before April 5th 2023 would be £4,121. It would take you just under three years to make back the cost of £4,121 thanks to the increase income of £1,514. This three year rule applies regardless of the number of years you are required to buy, therefore for a healthy retiree, maximising the State Pension income via Class 3 contributions is a ‘no brainer’.
A second area of understanding to note when it comes to the UK State Pension is the deferral rules. Often clients ask us if it’s worth deferring the State Pension, and the answer comes back to the horrible weigh up between cost benefit and longevity. Previously the rules allowed for a double digit escalation in income annually for deferring a year. This posed a more interesting argument, but today the deferral rate is 5.8%. On average, it takes a retiree 18 years in an increased State Pension (by 1 year) to recoup the benefits lost by not receiving a year’s income.
The final point I’ll make on the State Pension and associated planning is the inheritability. The rules changed in April 2016, meaning only additional or extra rates of State Pension are inheritable if the deceased was in receipt of the State Pension before 6th April 2016, or died before 6th April 2016 but would have reached State Pension age on or after that date. Given the lack of inheritability, it is sensible to plan as a household to maximise both NIC records to maintain this benefit.
Instead, widows should consider claiming Bereavement Support Payments, which is made up of a lump sum followed by 12 monthly payments.
Written by: Catriona McCarron
Date: 17 February 2023