The State Pension is a retirement income that an individual can receive once they reach their State Pension age (66 in 2023, but rising to 67 by the end of in 2028).At least one-fifth of people planning to retire intend to use their State Pension entirely for their retirement income. In 2023-24, the full new State Pension offers £203.85 per week (£10,600.20 per year) and it rises each tax year under the “triple lock” system - so, it is worth maximising.
In this guide, our Chartered Financial Planners explain how the UK state pension works and offer ideas about how to get the best income in retirement.
For more information and to discuss your own retirement needs and goals, please contact us for a free consultation.
How does the UK state pension work?
The UK state pension is usually paid to someone every four weeks in arrears. The income is paid before any tax is taken, but it may still be liable to Income Tax if your total retirement earnings exceed your Personal Allowance (£12,570 per year).
For instance, suppose you receive £10,000 per year from your own pension(s) as well as the full new State Pension (£10,600.20). Since the combined income goes over your tax-free Personal Allowance of £12,570, you will need to pay the 20% Basic Rate of Income Tax on £8,030.20.
You do not get your State Pension automatically. Instead, you have to claim it. You can do this up to four months before you reach your State Pension Age.
You do not have to live in the UK to claim and receive your State Pension income. However, you may need to follow a different process to claim it. Also, the “triple lock” rules (governing annual income rises) may not apply to you depending on where you live overseas.
Your State Pension income is guaranteed for the rest of your life. Once you die your spouse or civil partner may be eligible to continue receiving some of your benefits, in certain situations.
There is a difference between the “old” and “new” state pension. If you reached your State Pension age on or before 5 April 2016, then the old system applies to you. This comprises two main parts.
Firstly, you receive a “basic” State Pension according to your National Insurance (NI) contributions. Secondly, you may receive an “additional” State Pension which takes into account your earnings and whether you claimed benefits.
If you reached your State Pension Age on or after 5 April 2016 then the “new” rules apply to you. This is a single-tier system which was intended to simplify the State Pension.
Your State Pension income is largely determined by your National Insurance (NI) record. In 2023-24, you need at least 35 “qualifying years” to get the full new State Pension. You need at least 10 such years to get any State Pension income at all.
For many people, you will build up “qualifying years” of NI contributions automatically via your employment salary (since NI is deducted by your employer). However, for those with fluctuating incomes or periods with no earnings, things can get more complicated.
So, the first step in getting the best State Pension deal is to ensure that your NI record is accurate. You can check your record online, for free, using the UK government’s website. However, you may wish to seek professional advice to check that the record is correct in light of your past earnings, state benefits/credits and employment history.
If you have already built up 35 qualifying years on your NI record then you are likely already set to get the best State Pension deal. If you keep working after reaching your State Pension age, therefore, you may wish to stop making NI contributions.
If you have built up a sizeable record of qualifying years but have not yet accumulated the full 35 years, then consider your time horizon if you are still working. Will you automatically gather the rest by simply continuing to work until your reach your State Pension age?
In this case, no further action may be required. However, if “gaps” will remain on your record even if you continue to work, then it may be worth exploring other options with your financial adviser.
Deferral & "voluntary" NI contributions
At this point, there may be three main options to increase your State Pension income - deferring taking your State Pension income, making voluntary NI contributions or doing both.
The first option involves not taking your State Pension income once you reach your State Pension age. For every 9 weeks you defer you get a 1% increase in your State Pension - or, 5.8% every year. You need to defer by at least 5 weeks to get a higher income.
The second route involves checking over your NI record and identifying any “gaps” (i.e. missing “qualifying years”). The cost for each year may vary, but could cost up to £824. In 2023-24, this adds £302.64 each year to your pre-tax state pension. So, in 3 years it could pay for itself.
In some cases, it may be suitable to pursue both options. You can usually only make voluntary NI contributions up to the past 6 tax years. So, if you have gaps on your NI record further back than this, you may need to consider deferring your State Pension for a time.
At time of writing, the government has given everyone until April 5, 2025 to make any voluntary NI contributions going as far back as April 2006.