The state pension will be a crucial source of income for millions of us in retirement, though the actual amount you will receive can cause some confusion.
After all, there have been scandals around some pensioners receiving less than they should, as well as debates around when the state pension age should be increased.
So how do you go about working out what state pension you will receive in retirement? And what can you do today to boost the size of that state pension income?
We look at how to calculate how much state pension you will get.
How does the state pension work?
Understanding how the state pension works is crucial when it comes to calculating how much state pension you will get.
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With the state pension, the amount you receive will come down to the number of years of recorded National Insurance contributions (NICs) you have. That’s rather different from a personal pension, where the income you enjoy in retirement will depend on the performance of the stocks and shares you have invested in, as well as whether you opt to access that pot through drawdown or by purchasing an annuity.
There are actually two state pensions in place in the UK:
Basic state pension
The old, basic state pension applied to men born before 6 April 1951 and women born before 6 April 1953, so those eligible will have already hit state pension age.
The full basic state pension is worth £156.20 per week, though you would need 30 qualifying years to get that full amount ‒ fewer years of National Insurance contributions (NICs) will mean a smaller weekly pension.
New state pension
The basic state pension has now been replaced with the new state pension, and it works in much the same way in that the amount you get is determined by how many years of NICs you have.
The full new state pension is worth £203.85 per week, or £10,600 a year. In order to get the full amount you will need to have 35 years’ qualifying contributions.
How much state pension will I get?
To be eligible for anything from the new state pension, you need to have a minimum of 10 years’ NICs.
If you made NICs before 6 April 2016 ‒ when the basic state pension was replaced with the new state pension ‒ then these are used to work out a ‘starting amount’. This will be either how much you would have got under the old state pension rules, or what you’d get if the new state pension had been in place throughout your working life, whichever is higher.
Each year of contributions after 6 April 2016 will add around £5.82 to your state pension, until you reach the current maximum of £203.85.
So as things stand, if you have the minimum of 10 years of NICs you’ll receive £58.24 a week or £3,028.48
You can get a pensions forecast from the government of how much state pension you will get, through the Gov.uk website. You will need to register for the Government Gateway to use the state pension forecast tool.
What counts as National Insurance contributions for the state pension?
National Insurance contributions are paid once you are over 16 and start earning above a particular threshold.
For employees, that threshold is earning more than £242 per week, while for the self-employed they are classed as being paid once you make a profit of above £6,725 per year.
Many people have gaps in their National Insurance record, perhaps because they took time out to raise children, care for loved ones, or go back to study. However, you may qualify for National Insurance credits, which can help you plug some of those gaps.
National Insurance credits may be available if you are unable to work through ill health, you are unemployed, or you are caring for someone. Credits are also applied automatically if you receive Child Benefit.
You can find out more about eligibility for National Insurance credits on the Gov.uk website.
Can I make voluntary National Insurance contributions?
If you have gaps in your National Insurance record, and don’t qualify for National Insurance credits, then you can make voluntary NICs. This can boost your overall record and increase the size of the state pension you receive.
Buying a full year of NICs currently costs just over £907, while partial years are cheaper. For each year you buy you get an extra 1/35ths state pension – which is £302 a year – or £6,052 over 20 years.
This means that as long as you live at least three years after state pension age you’ve got your money back.
It’s good value when you consider that the state pension rises each year – by whichever is the highest of 2.5%, wages or CPI inflation, thanks to the state pension triple lock – and becomes more valuable over time.
You can usually buy voluntary National Insurance credits for the previous six tax years but there is currently an opportunity for those retiring under the new state pension system to fill gaps going back to 2006. This ends on 31 July.
It is really important to check with the Department for Work & Pensions whether you will benefit from buying voluntary credits as there may be cases where buying the extra credits does not boost your state pension.
What does the triple lock mean for the state pension I receive?
The state pension triple lock was introduced under the Coalition government, and is a way of ensuring that pensioners receive a meaningful increase to the size of their state pension each year.
Under the triple lock, the state pension increases at the start of each new tax year by the largest of the following three figure:
- The rate of inflation (published in September)
- The rate wage growth (published in September)
- 2.5%
The triple lock was paused for one year after the pandemic resulted in a rocketing rate of wage growth. However, it has since been restored, with the state pension increasing by 10.1% in April as a result of the rate of inflation.
With inflation remaining persistently high, despite successive increases to the bank base rate by the Bank of England, it appears likely that pensioners will be in line for another substantial increase next year.
For example, if the current 8.7% rate of inflation was registered in September, then that would mean an increase of £17.73 a week, or £922 a year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says the spiralling cost of the state pension means how much it pays will be subject to review.
“The triple lock has played a role in supporting pensioner incomes over the past decade but again this needs to be balanced with the needs of the younger working population.
She adds: “The state pension forms the backbone of people’s retirement planning, and they need some certainty on when they will receive it. We need to see a wide-ranging review of the system to see how this can be best delivered.”
How do I claim my state pension?
The state pension is not paid automatically when you reach state pension age. Instead, you will need to actively claim it.
The DWP will contact you in the months leading up to you reaching state pension age to explain how you can do this, such as through the government’s website.
If you don’t need the money immediately, then it may be worth deferring your state pension payments. Your state pension is increased by 1% for every nine weeks you defer. As a result, deferring your state pension by a year will mean the payments are boosted by around 5.8%.
When can I claim my state pension?
You can start to claim the state pension once you reach state pension age.
This is currently set at 66 for both men and women. It will increase to 67 by the end of 2028 and 68 between 2044 and 2046.
There has been speculation that the government was considering bringing this second increase forward to the late 2030s, though any decision on this has been put off until after the election at least.
Who has been underpaid their state pension?
The DWP has been subject to severe criticism in recent years after it emerged that thousands of people have been underpaid their state pension by substantial amounts.
The issues tend to centre on married women who were entitled to a state pension based on their husband’s National Insurance contribution record.
However, in many cases this increase did not take place, meaning that the women received a smaller state pension than they should have. While the DWP is attempting to correct these underpayments, there remain thousands of pensioners who have been underpaid, in some cases going back decades.
You can check whether you may have been underpaid by using this tool on the LCP website, and make a claim directly to the DWP if you have been underpaid.
Can I still get the state pension if I retire abroad?
So long as you have built up a sufficient number of qualifying years of National Insurance contributions, then you can still receive the state pension even if you choose to retire abroad.
You will need to start claiming the pension within four months of hitting the state pension age, and you can do so by contacting the International Pension Centre.
You can choose for the pension to be paid either every four weeks or every 13 weeks.
Your state pension will go up each year, so long as you retire in a country that is within the European Economic Area, Gibraltar, Switzerland, or a country with a social security agreement with the UK. There are two exceptions to this latter group: Canada and New Zealand.
Contributions from Katie Binn
