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The State Pension remains a topical subject, from the ability to top it up where shortfalls exist, the perhaps time-consuming administration of doing so, to the real advantages of the 'triple lock' increases so far, to its overall affordability, and of course the age at which income is paid. It can be quite a controversial topic and there is much to consider when looking forward to retirement and the income streams that might be available.

The potential income

Invariably, the State Pension offers good value when top-ups are needed, and we have seen a good few examples of this position of late. With the full value new State Pension now worth £221.20 per week, or £11,502.40 pa, currently increasing each year, this is not to be ignored, although you normally need to accrue 35 years of contributions to be able to achieve this. More can be found here: https://www.gov.uk/new-state-pension

Paid gross, but taxable

One key point is that the State Pension is taxable but paid gross. Therefore, when the income comes into payment it's not taxed at source, but it is taxable. Some have found that other pension incomes that are in payment reduce to accommodate the tax due, with the State Pension usually using up most, if not all, of the nil rate income tax band (up to £12,570 pa gross under current rules).

The triple lock

The current way State Pensions increase is via the triple lock. To achieve this, the full basic State Pension rises each year in line with the highest of three factors: earnings growth figures between May to July the previous year, CPI inflation from the previous September, or 2.5%. In recent years, the increases based on this process have been significant because of the effects of inflation, and inflation related factors.

Is there value in topping up?

With recent increases in the State Pension, some pensioners have been pushed into basic rate tax (starting at £12,570 gross pa) for the first time and are having to pay tax on their overall income.

We have a real-life worked example below for benefits accrued to the end of the tax year 2023.

Example

We identified for one client that they had a six year shortfall in National Insurance contributions. The client's standard unchanged entitlement was £169.35 per week, to the end of the tax year 2022/2023.

The cost of topping up, and the extra benefit bought, were found to be as follows:

*As noted above, this level of maximum income has increased to £221.20 per week gross from April 2024.

Subject to good / reasonable health and normal anticipated longevity, the State Pension might be in payment (and increasing) for 20 years as an example. Therefore, the example above demonstrates that the top up proposed in this example should offer good, long-term value.

Deferring the State Pension

Some clients consider this as an option. The increase applied is 5.8% for every full year of deferral and this uplift is paid as taxable income. Some consider this option whilst they continue to work, although deferring for a longer time might be a risk against normal longevity.

Summary

Many individuals do not rely on just the State Pension to provide them with income in their later years. In our experience, it is usually a combination of sources that creates the overall income position for those retiring.

If we have a change of government, it will be interesting to see if there is different approach to the way the State Pension is provided and increased in the future.Perhaps more controversy to come in future years?

We recommend that you plan ahead for all your prospective sources of income in retirement. This will manage expectations as to what might be achieved, or otherwise. Start now by checking your State Pension income here: check-state-pension

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No individual advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

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