I will receive my state pension this September when I will be 66.  Here is my confirmation letter from the DWP.  I have redacted some of my personal information.

 

State Pension Letter

 

Since the state pension is front of mind at the moment I thought I would give you my thoughts about it.

 

The state pension is a totally unfunded government pension scheme.  In other words, there is no money in the pot unlike a personal pension or a private sector final salary pension scheme. As such it is funded out of the general pool of taxation annually. That means that the taxes paid by taxpayers annually fund it. This is where the problem lies.

 

What happens when there are more retired people in the population than working people? How will there be enough tax revenue to support the majority of adults who will be retired. The answer is that it will be impossible to fund unless there are changes. The changes have of course already started to happen.  The state pension age has already been increased from 60 to 66-68 for women and from 65 to 66-68 for men. The state widow’s/er’s pension has been all but abolished too.  A measly three months state widow’s/er’s pension only is available for married people who reached state retirement age after 5 April 2016. Contracting out of the State Second Pension (previously known as SERPS) has also been abolished. It all amounts to a severe downgrading of state pensions.

 

Of course, the government knows the state pension scheme is bankrupt which is why they introduced auto-enrolment and workplace pensions a few years ago under which all employers have to contribute to a pension scheme for their staff.  The government is, in effect, privatising the state pension.

 

The retirement age for taking the state pension in the future will keep increasing as life expectancy increases.  I wouldn’t be at all surprised if the government were to introduce means testing for the state pension eventually.

 

Let’s face it the state pension is in effect a Ponzi Scheme.  In other words, it is a Pyramid scheme. Read Wikipedia’s definition of a Ponzi Scheme here https://en.wikipedia.org/wiki/Ponzi_scheme

 

Over the years a number of our clients have decided to defer their state pensions because they have carried on working after reaching state retirement age and they didn’t want to pay tax on their state pensions especially if they were higher rate taxpayers.  The government enticed them into deferring their state pensions because the State Pension will increase every week it is deferred, as long as it is deferred for at least five weeks. The State Pension increases by the equivalent of one per cent for every five weeks it is deferred. This works out as a 10.4 per cent increase for every 5 weeks deferred under the old state pension or 5.8% a year more for every 9 weeks deferred under the new state pension. The extra amount is paid with the regular State Pension payment.

 

Basically, if you reached state retirement age by 5 April 2016 your resulting pension, the so-called old state pension, was superior to the new state pension which is for people who reach state retirement age after this date.

 

The amount you will eventually be paid under the state pension works out higher but it is paid for less years and there’s the rub. The breakeven point is about 15-20 years.  Will you even live that long?  How can you be so sure? What if you die before taking your state pension or shortly afterwards? You may have saved 20%-45% Income Tax on your deferred state pension but your surviving spouse will only receive a 50% widow’s/er’s state pension for three months.  That’s a poor trade off in my opinion. It’s far better to take the state pension ASAP and pay the tax for the vast majority of state pensioners.

 

I will continue working past my state pension age for the foreseeable future.  I have no plans to ever retire. I will be putting my money where my mouth is. By the way, I don’t want to pay higher rate tax on my state pension any more than the next person so I will re-invest the £11,500 p.a. I receive as a net contribution into my SIPP.  HMRC will add 25% to my contribution in the form of tax relief which means I will be investing £14,375 (£11,500 x 1.25) into my SIPP annually. I will also be entitled to a further 20% tax relief as a higher rate taxpayer meaning I will get a tax refund of £2,875 p.a. (£14,375 x 40%-20%) annually. So the net cost to me for funding my £14,375 annual contribution into my SIPP fully funded by my state pension will be just £8,625.

 

What’s more my wife Cholpon will inherit my state pension funded SIPP 100% when I die. As it is likely to be worth more than £100,000 by the time I reach age 75 then that will be far better than a paltry state widow’s pension of just three months’ worth of my state pension.

 

Now that’s what I call a result.  You know it makes sense.*

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law 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. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.