State Pension: The five things you need to know about your State Pension
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The State Pension is one of the easiest ways for Brits to build wealth for the future, by racking up years of National Insurance contributions which are then credited by the Government when you no longer work. While the concept of a State Pension is the same across the UK, there are a number of variable factors which affect how much each person will receive when they are eligible for their State Pension payout – but what are the key points you should know?
What is a State Pension?
The State Pension is a type of pension which is payable by the Government once you reach a certain age.
Once you hit the qualifying age to receive your pension, it is payable for the rest of your life and this amount increases each year in line with inflation – something which is known as ‘buying power protection’.
The current pension rate which is payable per week is £179.60 for the year 2021/2022, which will leave the average pension-age Briton with £9,339.20 per year in pension pay-outs.
While this is the maximum yearly pay-out for some people, the amount you get paid may vary based on your National Insurance (NI) record.
When can you claim a full State Pension?
The new State Pension which was introduced in April 2016, is payable regardless of wealth, as long as you have met the minimum National Insurance contributions (NICs).
The current State Pension age is 66-years-old, though this is due to rise to 67 between 2026 and 2028.
When you reach State Pension age, you won’t qualify for the pay-out automatically, you will have to claim it.
The UK Government website states: “You should get a letter no later than two months before you reach State Pension age, telling you what to do.”
If you retired before April 5, 2016, you should visit the Government website to find out how to claim your pension as you will be part of the ‘old’ State Pension scheme.
How many qualifying years do you need?
To claim the new ‘single-tier’ State Pension you need 10 ‘qualifying’ years of National Insurance contributions, though this is different for people with no NI record before the new scheme was introduced.
GOV.uk states: “People with no National Insurance record before April 6, 2016, will need 35 qualifying years to get the full amount of the new State Pension, when they reach State Pension Age.”
If you don’t meet the qualifying NICs criteria, you may be able to make voluntary contributions of £15.40 a week in order to boost your pension.
Boosting your pension this way would cost you £880.80 for an entire year, which will boost your pension by just £249.60 per year, says Principles Personal Finance.
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NICs are automatically deducted from your wages by your employer and this percentage is then paid to HM Revenue and Customs.
The new State Pension minimum NICs thresholds are as follows:
- Lower earning threshold for employees is £128 per week / £6,240 per year
- Lower earning threshold for self-employed is £125 per week/ £6,515 per year
These contributions are made throughout your working life when you are earning over a minimum amount, which is currently over £184 per week.
From April 2022, NICs will increase by 1.25 percent which means people will pay NI at a rate of 13.25 percent.
How to find out your State Pension amount
State Pension amounts are specific to the individual based on the value accrued over your working years.
According to GOV.UK: “You can get a State Pension forecast online from the Check Your State Pension service.”
This provides personalised information including your State Pension age, an estimate of your State Pension value at the point at which you qualify and a forecast for the potential earnings if you were to increase this amount through deferral or other means.
How does tax affect your pension amount?
The State Pension is taxable, though it is paid before any tax is taken.
This means that though tax isn’t deducted from the value of your pension, it will use some of your tax-free personal allowance as it is treated as earned income.
In the year 2021-2022, the tax-free personal allowance value is currently £12,500.
You won’t pay NICs on your State Pension, even if you continue working into your retirement or beyond the State Pension age.
You can defer if you don’t want it yet
State Pension can be claimed when you reach the qualifying age and NI contribution criteria, but it won’t disappear if you are not ready to claim it.
Deferring the release of your State Pension means you may boost the amount payable when you decide to claim it.
Money added to this type of pension beyond the qualifying date may be taxable, though the longer you defer it, the more money you will add to the total value.
When deferring your pension, you should know that:
- Your pension must be deferred for a minimum of nine weeks
- The value of your State Pension will increase by one percent for every nine weeks you defer it for
- For every full year that you defer your pension, you could top it up by an extra 5.8 percent
- Your State Pension value won’t increase through deferral if you are claiming certain benefits
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