State pensions, like all other state benefits, are complex to understand fully which is why it is important to understand how to make the most out of a very valuable source of retirement income. Here is a list of ten things you need to know.
1. You have to claim your state pension! You should receive a letter from the government no later than 2 months before you reach state pension age telling you what to do. If you do not claim it you do not receive it. Anecdotally we have had cases where clients have had to wait much longer than 2 months to receive it so do put in your claim ASAP online, by post or by phone.
2. Usually, you will need 35 qualifying years of NI credits to get the full new state pension and at least 10 years before you get any payment at all. Usually, this means you must have paid a minimum level of National Insurance contributions each year. However, National Insurance (NI) credits may be available for: time spent raising a family and claiming child benefit, caring for someone who is sick or has a disability, or time spent enrolled in full-time training counts too.
3. You can obtain a state pension forecast at https://www.gov.uk/check-state-pension and check for gaps in your NI record at https://www.gov.uk/check-national-insurance-record or by phoning the national insurance helpline on 0300 200 3500.
4. If there is a shortfall in your state pension forecast, consider buying extra years. If you’re eligible and you could benefit, then consider paying voluntary Class 3 NI contributions. The cost is £15.85 for the 2022/23 tax year per missing week of NI contributions equivalent to just over £800 to buy a full year of NI credit.
You can also transfer NI credits from one partner to another under certain qualifying conditions to boost your state pension.
5. If you continue working after state pension age or have other retirement income then you may like to consider deferring your state pension. However, this is a calculated risk no matter how tempting it may be in the short term.
Every 9 weeks of deferment results in a 1% increase in your state pension. Defer for 12 months and the increase in your state pension is 5.8%. A not inconsiderable amount.
However, what if you were to defer your state pension for 5 years and then die? You will have given up approximately £45,000 (5 x c.£9,000) in state pension which will now be lost forever.
The Office for National Statistics has a ‘How Long Will My Pension Need to Last’ calculator, which shows that on average a man aged 65 has 21 years to live and a woman aged 65 has 24 years. When you consider that the break even point has been calculated as 17 years from when you start drawing your deferred state pension. What this means is that unless you have a long life expectancy you will lose out by deferring your state pension.
6. You can defer your state pension after you have started receiving it but you can only do this once. This may be useful if for example you are a basic rate taxpayer and you are going to face a large tax bill for one tax year. You may decide to defer your state pension for one year in order to avoid Income Tax at a rate of up to 45% or even an effective rate of 60% if your total taxable income is between £100,000-£125,140.
7. You may decide to defer your state pension then take your missed pension as a lump sum in which case this will be taxed at your current rate of Income Tax.
8. If you emigrate from the UK just be aware that your state pension will not necessarily continue to be increased annually. There are more than 100 countries globally where the UK state pension is not uprated annually such as Australia, New Zealand, Canada, South Africa, Thailand and India. If you move to an EU country, Switzerland or the US your state pension will be increased annually.
9. If you have earned income and you are a higher rate taxpayer in receipt of a state pension, why not re-invest it into a pension up until age 75 or even consider re-investing it into higher-risk investments such as EIS, SEIS or VCT without such an age restriction? This would enable you to claim back some or all of the extra tax you would otherwise pay on your state pension.
10. The state pension age depending on your date of birth is 65-68. The government has increased state pension ages a lot in recent years, especially for women who used to be able to claim their state pensions at age 60. State pension ages will inevitably rise even more in the years ahead. So if you do decide to defer your state pension, don’t commit an own goal and find that your state pension age has suddenly been revised until a date after you intended to stop the deferment!
In my experience state pensions make up a significant amount of total retirement income, at least 50%, for most individuals and couples. Therefore it is vital to ensure that you maximise your state pension and minimise the taxation of it in order to extract the most out of it. You know it makes sense.*
*The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.