Although not enough for an extravagant retirement, the State Pension is still a useful addition to your retirement income, and something you earn the right to after years of work.
When I come to build a retirement plan for a client I find that the State Pension income they are due to receive is different to others nearly every time.
If you are receiving your State Pension now or have seen what you are due to receive in the near future, you may be surprised when you compare it to a friend.
Your friend may receive or be due more than you even if you have worked and paid National Insurance Contributions for longer.
Here is probably why.
The State Pension and Contracting Out
Let’s just re-cap on the State Pension rules for a moment.
Under the current rules you now need to be deemed to have 35 qualifying years of National Insurance Contributions by the time you reach State Pension Age. Less than 10 years and you get nothing. Between 10 and 35 years and you get a reduced State Pension.
In the 1980s and 1990s the government offered a top up State Pension otherwise known as the ‘State Earnings Related Pension Scheme (SERPS)’ or the ‘State Second Pension (S2P)’. This top up was linked to your earnings. Meaning the more you earned the more that was deducted from your income to pay for a higher pension at retirement.
You did however have the option to opt out of this second top up pension and this was called ‘Contracting Out’.
If you chose to Contract Out you were usually set up with a personal pension, paid reduced National Insurance Contributions or received a rebate into your personal pension.
By receiving the rebate it meant that you were due a slightly lower State Pension in the future but had the benefit of having control and investing your own pension fund.
Whether this worked out for you in the long run depends on how the investment strategy used in your personal pension has performed over the years.
There were pros and cons for both sides but people who stayed Contracted In and paid the higher National Insurance Contributions will have a higher State Pension now than those that didn’t.
Planning with your State Pension
The additional State Pension and Contracting Out are no longer available so things should be more simple going forward. Any additional State Pension you built up before the change in 2016 will still be protected.
If you have yet to receive your State Pension and want to understand what you are due then you can find this out using the government’s State Pension Forecast. It’s free and easy.
If you would like to understand the tax implications of taking your State Pension, whether you should top it up or delay it then let’s have a chat and at least explore your options. Please get in touch for a no obligation chat at our expense.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
