For many, the UK state pension forms the foundation on which PPP (private pension provision) is built. How one qualifies, how much it will be, and at what age a person can expect to receive it, are all important factors that must be considered. With this, is the added uncertainty that exists around the timing of future state pension age increases, and what impact this will likely have on your private pension planning.
There are more misconceptions than we care to mention surrounding the UK state pension rules – many of which need to be changed, so we’ve dug deep and come up with 10. Ones we believe to be the most common and equal in importance.
- In order to receive the state pension, you must retire first
False. Dropped in the 1980’s, there was actually an earnings rule in place. Now however, there’s just two conditions. One is that you have reached the designated state pension age. The other is that You have the qualifying number of NI years behind you.
2. You can get an “early retirement” reduced-rate state pension between age 55 and your normal SPA
Wouldn’t that be great – but it’s not possible. So-called actuarially reduced early retirement pensions are only available with a selection of private and public service pensions but are not available for the state pension.
3. Your state pension is tax free
There’s a possibility that you will have to pay tax on some or even all of it. You’ve paid income taxes all your working life through your salary, now they want their pound of flesh too. Sadly, your state pension (what’s left of it anyway) is treated as taxable income and added to any other taxable income (e.g., private pensions, additional earnings and so on). Any excess after deduction of your personal tax allowance (currently £12,500 a year) is then subject to income tax in the normal way. And even if you are living outside of the UK, you may still have to pay UK tax on your state pension.
4. The new April 6th state pension is flat-rate
It’s not so straight forward. Long-term the intention is to have a single flat-rate state pension which most people who fully satisfy the NI conditions will receive, but… there are currently some people who will receive more than the flat rate (because of substantial SERPS/S2P holdings) while others who will receive less. That will be due to missing NI contributions or contracting-out deductions. Your PCC Wealth Manager can help you understand what this means for you.
5. You need 35 years of NI contributions to receive the full rate of the new state pension
Broadly correct. Except some people for whom the bulk of their NICs were made under the old system in the years leading up to 6 April 2016, could actually find that they have accumulated more than 35 years in total but still fall short of qualifying for the full pension.
6. You can always fill in the gaps of your NI record by paying voluntary contributions
It all depends where those gaps are. Normally, you can go back six tax years, but as indicated above, be wary of paying voluntary NI for those periods prior to 6 April 2016 where you may already have enough to satisfy the conditions under the old system (which would be 30 years). In which case, extra contributions will count for nothing.
7. Reduced-rate NICs which are payable under the old “married woman’s option,” also count in aggregate towards the state pension
Not true. Contributions of this type, which were phased out for newly married women in 1977 although retained in some cases for existing contributors, don’t count for the state pension.
8. NI credits are allowed automatically if you are at home looking after children
Only If… You are a parent registered for UK child benefit for a child under the age of 12 – even if you do not receive it. Other than that – the answer is no.
9. As soon as you receive your state pension, it increases by 2.5%, CPI inflation or National Average Earnings
It depends. In many countries your UK state pension will be frozen once you start receiving it – In Thailand for instance, which is the most popular retirement destination for retiring Britons. Only those living in the Philippines receive annual increases. Currently those retiring in the EU / EEA receive increases. Our PCC Wealth Managers can help you understand what the position is for the country where you plan to retire.
10. Deferring your state pension is only an option at SPA before you start to draw your pension
False. You actually have the option to stop and restart the payments of your existing state pension at any time. However, you can only do it once. This one thing alone seems to be an unknown option for boosting the level of a state pension.
What can you do right now?
Retirement means moving from money coming in, to money going out. Therefore, understanding what your retirement cashflow looks like, is essential. Speak to a PCC Wealth Manager TODAY or email email@example.com to request a call back.
We can help you to enjoy your retirement with peace of mind.