Is the state pension enough to live on? | Pension planning

Is the state pension enough to live on?

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    November 2023

    If you’re starting to think about your retirement plans (or if you have left it a little late), you may be wondering if the state pension is substantial enough to live on.

    The full state pension is currently £10,600 per year. How adequate this is depends on your personal circumstances, and for many, it may not be enough to maintain their desired standard of living. For a more comfortable retirement, making your own pension provision is essential.

    In this article, we’ll take a look at what the state pension is, when you can claim it, look further into whether it is enough to retire on and, if not, how much you need to save for a comfortable retirement income.

    Heritage Financial Planning has long experience in providing pension planning advice. To talk to one of our experienced financial advisers, please contact us.

    What is the state pension?

    The state pension is essentially a retirement income paid by the government when you reach a certain age. It is payable for life, regardless of how long you live. As it is funded by the government, it is guaranteed and does not depend on personal savings (and long may that continue!)

    The state pension is protected against the cost of living rising by the ‘Triple Lock’, so called because the state pension amount increases each year by the higher of:

    • Inflation as measured by the Consumer Price Index (CPI)
    • Average increase in earnings across the UK
    • 2.50%  

    What is the state pension age?

    At the time of writing, you can claim the state pension at age 66. However, it is set to rise to 67 between 2026 and 2028 and to 68 between 2044 and 2046.  

    This is mainly due to an ageing population and consequent smaller workforce, which puts a strain on public finances.

    How do I qualify for the state pension

    If you reached the state pension age before 2016, you will be in receipt of the old state pension, which was based on the basic state pension and additional state pension.

    If you reach the state pension age after this date, you will be in receipt of the ‘new’ state pension, which is based on a flat rate and replaces the old basic state pension and additional state pension.

    This article is focused on the new state pension, post-2016. You can read about the old state pension here, as the rules are different.     

    How much is the state pension?

    The state pension is designed to support basic needs, and the full amount is currently £203.85 per week or £10,600 per year. It is usually paid every 4 weeks, and you have to apply for it.      

    The amount you receive is based on how many qualifying years of National Insurance contributions you have made. You usually need at least 10 qualifying years to get some form of state pension. To receive the full state pension, you need to have made 35 years’ worth of qualifying contributions.   

    To accrue qualifying years, you need to:

    • Be employed and earn over £242 a week from one employer (although it may still be possible to achieve a qualifying year if you earn between £123 and £242 per week).
    • Be self-employed and pay National Insurance

    It is easy to check your National Insurance record, and it is definitely worthwhile as you may need to top up your contributions.

    Is the state pension enough to live on in retirement?

    Whether the full state pension is enough to live on depends on your personal circumstances, of course. It depends on your desired lifestyle, outgoings, and spending habits. Whether you have a spouse or partner with their own pension income will also have an impact.

    If you haven’t already, we urge you to complete an income and expenditure exercise to work out how much retirement income you will need to remain comfortable.

    The Retirement Living Standards carry out a survey which looks at the average income a UK retiree needs for a minimum, moderate and comfortable retirement in the UK.

    The results can be seen below:

    The first observation to note is that if you are single and your only form of income in retirement is your state pension, then according to the RLS, it may not be enough to live on.

    However, interestingly enough, if you are a couple and you both receive the full state pension (£10,600  x 2  = £21,200), this may be enough for at least a minimum standard of retirement.

    While retirement may still seem a long way off, this demonstrates that it’s never too early to start saving into a pension pot if you want to be comfortable in retirement.

    How much private pension is needed in addition to the state pension?

    We have based these figures on the Retirement Living Standards survey findings and assume that our subject, Matthew, is single and will receive the full state pension.

    Level of RetirementIncome NeededState PensionShortfall Amount
    Minimum£12,800£10 600 £2,200
    Moderate£23,300£10,600 £12,700
    Comfortable£37,300£10,600 £26,700

    Regardless of the level of comfort desired, Matthew has a shortfall that needs to be funded from somewhere else, be that a private pension, workplace pension, rental income, or even part-time work.

    Focusing on a private pension to plug the gap, we can use something called the 4% rule to estimate how much Matthew needs to save to meet the shortfall amount.

    This originated from a 1994 US study that found that if you were invested in a balanced portfolio made up of 60% stocks and 40% bonds and withdrew 4% of your pension each year over 30 years or less between 1930 -1970, then historically, at least, you wouldn’t exhaust your retirement savings. It is often described as a Sustainable Withdrawal Rate (SWR).

    To calculate how much Matthew needs, we simply take the shortfall amount and divide it by 4%.  

    Level of RetirementShortfall AmountFund Value Needed (4% rule)

    The 4% rule doesn’t guarantee that you won’t run out of money, as there are too many variables at play, such as future investment returns, the age at which you retire and the length of your retirement. However, it is a good framework for giving you a rough idea of how much you need to save.

    Get pension advice from Heritage Financial Planning

    Pension and retirement planning is complex, so the help of an experienced financial adviser can be very valuable. Whether you are looking to retire soon or are just starting to save, the experts at Heritage Financial Planning can provide advice and help you put a retirement plan in place to meet your goals.

    Contact us today to get started.

    Frequently asked questions about the state pension

    Can you top up your National Insurance contributions?

    If you carry out a state pension forecast and you have gaps in your National Insurance record, then it may be possible to ‘top up’ your state pension. Usually, this is only possible with gaps from the past 6 years.  

    You may be able to make voluntarily class 2 or 3 NI contributions, so if you fall into this bracket, it’s worth considering. This is a complex area, and should you need to, you can contact the government’s Future Pension Centre.

    Can you defer your state pension?

    Yes, and it can be a useful option if you plan to work past retirement age (or you have other income), as a) the state pension is subject to income tax, and b) your state pension will increase for the length of the deferral.

    It will increase by 1% for every 9 weeks you defer taking it. This works out at 5.80% for every 52 weeks that you delay taking it. Assuming you receive the full state pension of £10,600, this could increase the annual income by as much as £614 a year!

    Do you pay tax on the state pension?

    Yes, the state pension is classed as taxable income and will be subject to income tax at your marginal rate. However, if this is your only income, it may be within your tax-free personal allowance, which is currently set at £12,570.

    HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax planning. Past performance is not a reliable indicator of future performance and should not be relied upon.

    Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

    Contact Me Today

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