Basic State Pension

For many people a pension will be the largest financial investment, other than their house, that they make in their lifetime. With current life expectancy in the UK into the early 80s and increasing by one year in every four, pensions are more important than ever. For many people it will be their lack of pension that will determine their financial freedom and quality of life in old age.

When working out your personal plan for your retirement there are several steps you can take to help you with your pension planning, and the first of these is your state pension.

While many people regard the state pension as only a small part of the pension planning, it is a very vital one. For most people it will be the only pension they have which contains no investment risk and no inflation risk. As the state pension is paid at a flat rate based on qualifying national insurance contributions, it is guaranteed by the government and does not rely on investment performance in any way. Additionally the basic state pension is increased on an annual basis, and while it offers no absolute guarantee that the increases will fully cover the cost of inflation, it is about as good as you can get. In recent years inflation has been low but this could be seen as the exception to the norm. At 5% inflation the value of money halves in 14 years, which is less than average life expectancy at the current state retirement age.

In order to qualify for a state pension an individual must make qualifying national insurance contributions for ten years, and in order to claim the full state pension, 35 years contributions are required (changed from 30 years).

The first step in planning your state pension is to find out how many years’ contributions you currently have credit for. This can be done by visiting the UK government website and requesting a personalised statement.

On receipt of this statement you will be able to work out number of years contributions you will require to qualify for the full state pension and plan accordingly. The statement will show which years you have contributed for and any gaps that you have. It is possible to make up any missed contributions, up to a maximum of seven years, and you can request a quote to show you the cost of doing so. This cost will vary dependent upon which class of National Insurance contributions you are eligible to pay.

For those approaching retirement age, this step is doubly important as the most recent changes mean more people will need to act in order to claim the maximum pension.

In some circumstances it is possible to be credited for national insurance contributions without actually paying any. The most common method of achieving this is to claim child benefit. While recent changes to child benefit have led some to feel it is not worth claiming, if one of the parents is not making national insurance contributions by claiming child benefit in their name, they can be credited with up to 22 years’ of contributions toward their state pension. This can be invaluable for those who take career breaks or spend time abroad either working or accompanying a partner.

Couples should plan to maximise their overall state pensions as everyone is treated as an individual by the government. Only planning contributions for one person may mean a missed opportunity.

John Milne

Principal - Anglo Scottish Financial Services