It is very easy to take your pension for granted – especially your state pension. Too often we can easily fall into the trap of thinking it is guaranteed to be there to support us when we retire – and that everyone will get the same amount. But the rules around pensions have changed over recent years and there are many reasons why you may find that the weekly amount you are due to receive is lower than what you expected.
The great news is – there is a way to boost it to full rate! More than that – you can actually boost it above what is classed as full level! The method you use to boost your state pension depends on how close you are to retirement, what type of state pension you are receiving and if you have that little bit extra money to spare. A relatively small amount paid now could prove to be a really valuable investment for the rest of your life. First of all you need to understand which pension you are receiving…
Something old, something new…
In the old state pension system, there were two tiers: a basic rate earned through National Insurance contributions (£122.30 per week) plus an ‘additional pension’ of up to £40 per week, which you would get if you were signed up to SERPS (State Earnings – Related Pension Scheme). The new State pension system brought in on April 6th 2016 made everything simpler as there was one rate which is earned simply through National Insurance contributions (NI). The new full retirement pension is £159.55 per week. If you reach your retirement on April 6th 2016 or after, then it applies to you. If you retired before this date you will be on the old state pension system.
The ‘additional pension’ has now been scrapped but in order to be fair to people who had amassed extra cash through this system this is still taken into account. The government calculates what you would receive under both systems and gives you the higher of the two.
Explaining the state pension shortfall…
So – there are two reasons why you may not be receiving your full state pension:
- NI contributions: The minimum contribution to receive a state pension is 10 years, however to qualify for the full rate of UK state pension you need to have paid 35 years of NI contributions – at the full rate. If you have less than this, it is called a gap. A gap will lead to a reduced rate in your pension. You may have a gap because you were self-employed and did not pay voluntary NI; you were living overseas; or you did not claim benefit while unemployed (you could be credited with NI through your benefits).
- Contracting out: If you worked for the government sometime in your career before the new pension was brought in, you may have contributed to the State Earnings-Related Pension Scheme. This meant that a lower rate of NI was paid and the extra cash was paid into a workplace pension scheme. As you did not pay the ‘full’ NI, you will not get the full rate of £159.55 per week. However, the government deduct an amount equivalent to the NI payments you missed out on. You can check the amount you are likely to receive by visiting the state pension checker here
Boosting your State pension!
Filling the gap
If you have a bit of extra cash it is possible to top up some of those gaps by buying extra NI qualifying years. These are called class 3 voluntary NI contributions. £741 (the cost of 1 gap year) may seem a fair old amount in the short-term but, because it will be adding regularly to your weekly pension, it could be worth thousands in the long-term. See the government site for further info about how to pay
Deferring your pension
If you can afford to hold back taking your pension straight away you can defer receiving your state pension. Government rules state that for every 9 weeks you defer your state pension, it will rise by 1%. This works out at 5.8 % for every full year.1 So even if you are receiving the full rate you can keep increasing your pension as long as you can afford to keep deferring.
Check out pension credits
If you have a state pension gap, you could be eligible for pension credit. This is an income-related benefit for those who do not qualify for the full rate of the new state pension. It is means-tested so all your income and savings will be assessed and if you don’t have enough money to buy NI years, your state pension will be topped up to the full rate.
And what about other pensions?
Ok. Now you are on track with your state pension, it’s a good time to get all your savings straight for when you retire. Have you reviewed your workplace pension or personal pension recently? If you don’t know how it is performing, or whether the features it offers are still in line with your own needs and aspirations, you may well miss the chance to maximise savings for your retirement. A pension review can be a great way to put your mind at ease, compare its development and benefits with other pensions on the market and help you prepare your financial affairs for the future.