The UK government offers eligible retirees a modest State Pension once they reach the age of 66 (rising to 67 by 2028). With the full State Pension currently worth only £185.15 per week (2022/23), many retirees would struggle to live comfortably on this amount alone. However, not everyone will be entitled to the full State Pension meaning that many will actually receive far less at retirement. So why’s the UK State Pension so low? And what can you do about it?
How’s the State Pension funded?
The short answer is the State Pension’s funded by UK taxpayers, specifically through National Insurance contributions. If you’re employed, National Insurance contributions are usually automatically deducted from your wages enabling you to accumulate ‘qualifying’ years towards your State Pension. If you’re self-employed, you’ll be responsible for making sure you’re paying the right amount of National Insurance based on your income.
You’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension at all. If you’ve completed 35 or more qualifying years, you’re entitled to the full State Pension, which is worth £9,627.80 per year (2022/23).
Even though participation in the State Pension is mandatory for taxpayers, because National Insurance must be paid by all workers, payments when you reach retirement age aren’t guaranteed. The pounds you pay in through National Insurance aren’t set aside for your own personal retirement fund, like how defined contribution pensions work, but are paid out to current retirees. This means the State Pension system is sensitive to changes in population.
While changes in population can put pressure on the State Pension’s ability to support retirees, political agendas can also impact how meaningful the received benefits are. The government introduced the triple lock commitment to State Pensions in 2010, to safeguard its value against the UK’s rate of inflation. The November 2022 Autumn Statement maintained the triple lock promise, meaning the State Pension will rise by 10.1% from April 2023.
This means the full State Pension, for those retiring after April 2016, will rise to £203.85 per week or £10,600 per year – taking it above the £10,000 benchmark for the first time. The maximum basic State Pension, payable to those who reached State Pension age before April 2016, will rise from £7,376.20 to approximately £8,121 a year (£156.18 a week).
Can I live on the State Pension?
In order to plan successfully for your retirement, you may want to consider what income you’ll reasonably expect to receive. One method of measuring your anticipated retirement income is using the government’s State Pension forecast tool.
If your State Pension forecast’s lower than you’d hoped, you can take action by making voluntary contributions to catch up on any ‘lost years’ on your National Insurance record (which could be caused by parental leave or a period of unemployment), or focus your efforts on boosting your private pensions (like a personal or workplace pension) instead.
What can I do to retire comfortably?
Research by Which? found two-person households spend around £28,000 a year on average to be ‘comfortable in retirement’. Whereas the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards estimate that two people would need £30,600 a year for only a moderate retirement income, with a comfortable option costing close to £49,700 a year.
The three different types of pension schemes in the UK are the State Pension, workplace pensions and personal (or private) pensions. You may have accrued benefits in each of these pension schemes, or none of them, depending on your personal circumstances. The government’s free Pension Tracing Service can help you find your old pensions, and our pension calculator will help you visualise how much your defined contribution pensions could be worth at retirement, and how long these savings could last if you draw down a desired amount each year.
If you’re over the age of 50 and are considering your retirement options, you may benefit from a free Pension Wise appointment. You can book your appointment online.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
