Why you need to understand your State Pension entitlement

Published on November 2, 2021 by Blackstone

Your State Pension may only make up a relatively small portion of your retirement income, but it’s an important part of it, and so it’s crucial you understand your entitlement. The recent news of underpaid State Pensions shows that many people don’t know how much they should receive.

More than £1 billion unpaid to pensioners

While the State Pension can seem straightforward, in reality, it can sometimes be complex. Despite efforts to simplify the State Pension system, recent reports of pension underpayment to women have highlighted how many people still don’t understand what they’re entitled to.

Earlier this year, it was revealed that thousands of women had been underpaid by the government. It’s also estimated that around 134,000 pensioners haven’t been paid what they should. While the government is correcting the mistake, it could take years to distribute the £1 billion of underpayments. Those affected will receive an average payout of £8,900 each.

The error has mostly affected elderly, widowed or divorced women due to the complexities around married women claiming a basic State Pension based on their husband’s record of National Insurance contributions (NICs).

While the Department of Work and Pensions have said human error played a role in the mistakes made, the scandal does highlight how complicated it can be to calculate how much State Pension you should receive.

So, why do you need to know how much State Pension you’re entitled to?

1. Mistakes happen. As the recent underpayment highlights, mistakes do happen. If you understand how the State Pension works, you’re far more likely to notice if errors do occur and ensure these are rectified sooner.
2. You can spot gaps in your NICs record. How much State Pension you’re entitled to will depend on your NICs. In some cases, you may have an opportunity to fill in gaps on your record, which could increase the amount of State Pension you receive.
3. The State Pension provides a retirement income foundation. The State Pension provides a reliable income throughout retirement. As a result, it can play a valuable role in your long-term financial plan by providing security if other income sources are affected by things like investment market volatility.

Understanding the State Pension means you’re in a better position to create a long-term financial plan that helps you reach your goals.

How does the State Pension work?

If you reached the State Pension Age before 6 April 2016, the old State Pension rules will apply. However, most people planning for retirement now will qualify for the “new State Pension”, which sought to make the State Pension simpler.

Under these rules, you need at least 10 qualifying years on your NI record. They do not have to be consecutive years. To receive the full State Pension, £179.60 each week (£9,339.20 annually) in 2021/22, you’ll need 35 qualifying years on your NI record. If you have between 10 and 35 qualifying years, you’ll receive a proportion of the State Pension.

If you have fewer than 35 years on your NI record, you can often buy additional years to increase how much you’ll receive from the State Pension.

In addition to the amount you’re eligible to receive, you need to know when you can claim it. The State Pension Age for men and women has now equalised and is gradually rising. In October 2020, the State Pension Age hit 66 and will reach 67 by 2028. It is being kept under review and could rise further in the future.

To understand what you’re entitled to under the State Pension, you need to know your State Pension Age and how many qualifying years you have on your NI record. The government’s State Pension forecast can help you understand what to expect.

How the State Pension can help you maintain your spending power

While other sources of income in retirement may fluctuate depending on your circumstances or investment performance, your State Pension is valuable because it’s reliable. It also rises each tax year, helping to maintain your spending power.

As the cost of living rises, an income that remains the same will gradually buy less. Over a retirement that could span decades, even small increases in inflation can have an impact on the lifestyle you can afford. So, an income that rises alongside this is important.

Usually, the State Pension annual rise is protected by the triple lock. This means that the State Pension will rise by the highest of:

• Average earnings growth year-on-year for the May–July period
• Inflation in the year to September, measured by the Consumer Price Index
• 2.5%.

However, average earnings growth will not be included when measuring how the State Pension will increase for the 2022/23 tax year. In 2020 during the May–July period, the country was in lockdown due to Covid-19. Many people experienced reduced wages due to receiving 80% of their usual salary under the Job Retention Scheme when they were unable to work. As the economy began to reopen, this inflated earnings figures, and the triple lock meant that pensioners would have received a record 8.8% boost.

The government has argued the earnings growth for this period don’t reflect reality and will not use this measure when calculating the State Pension increase for the 2022/23 tax year. As a result, the new State Pension will increase by 3.1% for the 2022/23 tax year and pensioners will receive £185.15 a week (£9,627.80 annually).

If you need help understanding how your State Pension fits into your wider retirement plans, we’re here to help. Please get in touch to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.