Lots of retirees aren't getting as much from the State Pension as they may have expected. Here's why.
When the time comes to retire, millions of us will rely to some extent on the State Pension to support us.
Indeed, dependency on the State Pension is actually increasing according to new data from the Office for National Statistics, with the typical retired household receiving cash benefits worth £12,612 in 2017-18, with State Pension income making up 83% of that.
Contrast this to five years ago when income from the State Pension accounted for 77% of the overall income of a retired household (which back then stood at £11,735).
However, while you may be able to rely on receiving some money from the state, the actual amount you get may come as an unwelcome surprise.
Failing to get the maximum
A new freedom of information request from Canada Life has revealed that less than half of pensioners able to claim the new State Pension are receiving the full amount.
Since the system was rejigged a couple of years ago, the maximum weekly State Pension that older people can receive is £168.60.
Yet the data from Canada Life confirmed that around 38% of retirees are getting less than £150 per week.
In fact, just a third are receiving in excess of £150 per week, confirming that huge numbers of older people are missing out on the full State Pension.
A tale of two pension systems
The new State Pension came in back in 2016.
Under the rules, you need to have 35 years of qualifying National Insurance contributions in order to receive the full amount. Fewer years mean a smaller State Pension.
It’s a simple enough system – or at least it should be – for people that have only been making contributions since 2016.
The trouble is that for people who have retired in the last couple of years, they are subject to both the new State Pension regime and what came before.
What’s my ‘starting amount’?
For people that were subject to the old system, their National Insurance record before 2016 is used in order to calculate a ‘starting amount’.
This is the higher of either the amount you would get under the old State Pension rules or the amount you’d get if the new state pension had been in place when you first started working.
This is then combined with their record post-2016 to determine what they get.
Gaps in my record
There are a few different reasons people may be receiving less than the full amount from the State Pension.
If you have a few missing years in your National Insurance record, perhaps because you took some time out to care for loved ones or go travelling, then that may leave you with a smaller payment.
There’s also the issue of ‘contracting out’.
This was something many people did in years gone by, where they essentially opted out of the second State Pension – reducing their National Insurance contributions in the process – in order to pay into a private pension.
If you contracted out, your private pension should get a boost as a result, but it will reduce the State Pension you’re entitled to.
Filling in the gaps
Clearly, for anyone whose working life straddled the two versions of the State Pension, the system is going to end up a little complicated.
As a result it’s a really good idea to get a State Pension forecast from the Department for Work and Pensions so that you have a working idea of just how much you’re likely to get once you pack up the daily grind.
And if there are gaps in your record, meaning you’ll get less than the full amount, then you may want to consider making voluntary National Insurance contributions to fill them in.
For the current tax year, the voluntary contributions will cost you £3 per week for class 2 National Insurance and £15 a week for class 3.
Just to add to the confusion though, you may have to pay different rates if you’re looking to fill in gaps from between 2011 and 2016.
Alternatively, you might want to check whether you were entitled to National Insurance credits for those missing years in your record if you were unemployed or caring for relatives.
Now read everything you need to know about pensions, which covers everything from your first contribution to what happens to your funds when you die.
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