The State Pension forms the foundation of people’s retirement income. It’s currently £11,502 a year for someone receiving the full amount – that’s just over £221 a week.
What age you’ll be able to claim your State Pension will mainly depend on what year you were born – the current State Pension age is 66, but that’s due to rise in the future as we’re now living longer.
However, while we might be living longer, we’re not necessarily healthier – and this is creating some hidden horrors for our retirement planning.
The latest government data says a healthy life expectancy (the number of years someone is expected to live in good health) is now less than 63 years old for both men and women – a full three years less than the current State Pension age.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.
Remember, pension and tax rules can change and any benefits depend on individual circumstances.
What could this mean for your retirement?
It raises the very real prospect of people being too ill to work, but too young to get their State Pension. To get the full entitlement, you’ll need 35 years of National Insurance (NI) contributions. But if you’re unable to work, that prospect becomes harder to reach.
This creates a hole of almost £35,000 for someone needing to fill the three-year gap today – even more if you add in the annual increases from the triple lock.
This is an enormous chunk of money that many will struggle to find.
It demonstrates the importance of saving what you can into your pension, so you’re able to deal with any challenges you face in later life.
The State Pension age will also rise to 68 by 2044, extending the possibility of working later even further.
You can draw an income from your Self-Invested Personal Pension (SIPP), personal or workplace pension from 55 (going up to 57 in 2028) – this could help bridge the gap. However, you need to plan carefully to make sure you don’t run out of money.
As an example, if the State Pension increased by 3% per year, then it would hit around £23,000 per year by the time a 40-year-old today needed to retire at age 63. And it would continue to grow from there.
They’d then need at least £120,000 to cover the cost of missing their State Pension for the five years until they hit State Pension age of 68.
What can you do about it?
These are big numbers, but it’s well worth saying that auto-enrolment means more people could be saving into their workplace pensions for longer.
These larger pensions over time will lead to better retirement incomes that could make up some of the gap.
Let’s also not forget the role employer contributions, as well as government tax relief, can play in taking the sting out of these figures.
There are employers who contribute more than auto-enrolment minimums and might also boost their contributions if you increase yours – the so-called employer match.
It’s worth checking to see if your employer does this as it can bolster your pension pot without you needing to put much more in.
You should also take the opportunity to increase your pension contributions whenever you can – for instance when you get a pay rise or a new job, bearing in mind that you can’t usually access the money until you are at least 55.
It can be a great way of boosting your pension relatively painlessly and help you make sure early ill health doesn’t derail your retirement plans.
If you’re a UK resident under 75, you can usually pay up to £60,000 into pensions each tax year and get tax relief from the government. You’ll only get tax relief on personal pension contributions up to 100% of your earnings, or £3,600 depending on which is higher.
Generally, basic-rate tax relief is paid automatically on top of anything you pay into your pension. If you’re a high earner, you can then claim up to a further 20% or 25% (different rates will apply for Scottish taxpayers).