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Maximising Returns from State Pensions

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Pensions...

Transitioning from the old multi-tiered state pension system to a flat-rate system was promoted by the government as a means of saving money while also making state pensions more fair for all workers. Only history will tell us if the new pension system implemented from April 2016 achieves those goals. In the meantime, workers need to concern themselves with maximising the returns from their state pensions in order to achieve as much retirement income as possible.

Changes to the pension system dictate consumers will have to consider several options they did not worry about in the past. By the same token, some of the strategies financial advisers have recommended for years are still in play. Anyone unsure of how to utilise his or her state pension to maximum advantage would do well to sit down with an experienced financial advisor capable of providing sound advice.

The three most important things consumers need to know about the new flat-rate pension are as follows:

  1. From April 2016, all workers reaching state retirement age will receive a flat-rate payment. Both SERP and the second state pension have been eliminated.
  2. The maximum state pension payment under the new system is not permanently fixed. It will be recalculated on a regular schedule to account for changes in the cost of living.
  3. The Pension Credit remains intact under the new system; other social benefits credits have either been eliminated or modified to fit into the new system.

Deferring Your State Pension

There are multiple ways to maximise returns from your state pension, including deferring your payments. In other words, you are not required by law to begin receiving state pension payments as soon as you reach retirement age. You can choose to defer your state pension for as long as you like. Doing so will increase the amount you are paid when you finally do start collecting.

Consumers should know that they must inform the government in order to begin receiving payments from state pensions. If you do not do so, you will be deferring by default. That is not necessarily a bad thing. Those collecting state pension payments under the old rules receive a 10.4% boost for every year they defer; pensioners operating under the new system get a 5.8% boost.

Deferring state pension payments will result in higher payments once you start collecting. You will also receive a lump sum to cover all of the payments you deferred. That means if you defer for an entire year, your first payment will consist of 12 months of deferred payments plus your first payment for the current year.

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Making Additional Contributions

Monthly payments for state pensions are calculated based on an individual's National Insurance record. A worker must have a minimum of 10 years of contributions to receive the state pension. In order to receive the maximum payment, one must have 35 years of National Insurance contributions.

Pensionable years do not have to be consecutive to qualify. Also, keep in mind that there are certain exceptions – like temporarily leaving work to have a baby – that may still qualify as pensionable years on your record. If you have any questions about your National Insurance record, the GOV.UK website provides a free tool for finding out where you stand.

We say all of this in order to explain that you can increase your state pension payments by making additional contributions to National Insurance. There are a number of ways to do this, including a Pension Top Up scheme offered to qualified workers through October 2017. Topping up your pension essentially allows you to purchase up to £25 in additional monthly income by making supplementary National Insurance contributions while you continue working.

Making additional contributions is not the right strategy for everyone. Depending on how much you want to boost your state pension income, you might be able to do better by taking the same money you would devote to additional contributions and putting it in a savings account instead. This is something your financial advisor can help you figure out.

Continue Working at Retirement Age

A third way to maximise the returns from your state pension is to continue working beyond retirement age. There is no legal requirement mandating that you retire, so you are free to keep working as long as your employer is happy to keep you around. And even if not, you might be able to find a new job to replace your old one.

Continuing to work beyond retirement age accomplishes two things:

  • it allows you to defer your state pension; and
  • it allows you to continue contributing to the state pension system.

Both benefits mean higher payments in the future. If you have personal pensions as well, continuing to work beyond retirement age will allow you to keep contributing to them. Every pound you put away by continuing to work means more income when you decide you have had enough.

The End of the Second State Pension

Doing away with the second state pension has been controversial, to say the least. But the government had good reason for doing so. Too many people were opting out of the second state pension but not putting any additional money into personal pensions or other investments. When it came time to retire, pensioners were not getting enough from their state pensions to make ends meet. Eliminating the second state pension addresses this problem.

The government has boosted the basic state pension payment to account for the elimination of the second state pension. From April 2016, the basic payment is expected to be £155 per week – paid to anyone with 35 years of National Insurance contributions. That amount can be boosted by applying for the Pension Credit.

The Pension Credit is a means-tested social benefit intended for pensioners who have insufficient income to pay their bills. Some estimates suggest that only 75% of pensioners eligible for the credit have applied for it. Applying is something you should strongly consider if you are approaching retirement age in the near future.

Also note that eligibility for the Pension Credit may also make you eligible for additional social assistance programmes, including local tax relief and housing assistance. Any of these additional programmes linked to the Pension Credit will not be accessible unless you apply for, and receive, the credit.

A Time of Transition

State pensions in the UK will never be the same thanks to the introduction of the new flat-rate system. The next 10 to 20 years will be a time of transition as older pensioners pass on and younger workers reach retirement age. During this time of transition, there will be plenty of workers who find themselves caught off-guard by the changes. We don't want this to be the case for you. We recommend you sit down with a financial advisor to develop a sound plan for your retirement.

A financial advisor can explain all of the changes relating to state pensions in a way that you can understand. He or she can advise you as to how heavily you will be able to rely on state pension income when you retire, along with other options that might be available to you. The key is to start planning for retirement as soon as you possibly can.

In closing, you can get a state pension statement if you are within 30 days of reaching retirement age simply by contacting the Pension Service. Statements can be obtained online or by requesting one over the phone. If you are more than 30 days from retirement age, the Future Pension Service can provide you with a statement as well. Please bear in mind that your statement will be an estimate based on your current National Insurance record and assumptions that you will continue contributing until you reach retirement age.

State pensions are intended to provide supplemental income during retirement. Taking the steps necessary to maximise your returns will mean more income once you stop working.

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