Confusingly, there is no single answer to this question, but the first consideration is which type of State Pension you qualify for.

For younger people, broadly under the age of 50-60 a full State Pension can be built up by paying national insurance, or receiving similar credits (for example through unemployment, or being a parent or carer) over 35 years of their life. The current State Pension from 6th April 2018 is £164.35 per week.

However the “old” basic State Pension, which on the face of it is lower at £125.95 per week can actually achieve a better outcome because there is a second State Pension which is earnings related and sits alongside this which could give more than the £164.35 per week total; indeed, I have seen well over £200 per week on many occasions.

For those born before 6th April 1951 (men) or 6th April 1953 (women) it was possible to defer their State Pension, achieving a 10.4% per annum uplift. This is an historic anomaly, which is not going to continue into the future due to the move to the single tier State Pension above, which receives a less generous rate of deferment (5.8% per annum).

The simplest way to find your State Pension forecast is to complete an application on line or to send a BR19 to the Department of Works & Pensions. Anyone not currently in receipt of a state pension would find the DWP work out the better of the two rules above, but do not actually tell you whether you are qualifying on the new or old basis. The two main things to consider are: the closer you are to state pension age, and the higher your earnings in work in life the more likely you are to benefit from the old rules rather than the new rules, and if you are projected to receive more than £164.35 you must be receiving a combination of basic and earnings related pensions under the old basis.

Self-employed individuals have universally benefited from the new rules as they did not qualify for the earnings related element under the old State Pension rules, conversely those who have “contracted out” (opted out the earnings related state pension) will see their pension reduce on both basis accordingly.

In terms of the capital value of the State Pension the cost of providing an inflation linked pension (and the basic state pension receives the “triple lock guarantee” – the highest of higher of inflation, average earnings or a minimum of 2.5%) is significant. Using current annuity rates the value is in the region 30 to 40 times the income value!

This means with a State Pension of in excess of £8,000 per annum now common, this has comparable value to a private pot of something in the region of £250,000; and a married couple would have hidden wealth of around £500,000-£600,000 purely from their State Pension.

When building long-term financial plans we highlight how an individual might expect to enjoy their retirement from all sources and the State Pension is an important part of planning for most people – if you would like to understand better what you might achieve in your retirement please do not hesitate to get in contact – and do not underestimate the value of your State Pension.

Opinions & Insights

Pensions reform kicked into the long grass?

It is noteworthy that his announcement does not rule out any changes to pensions at all, but does make the previously leaked proposals to reduce pension tax relief to a flat rate for all individuals to be kicked into the long grass. Read more →

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