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State Pension

What is it?

The state pension is a weekly income paid by the Government to the vast majority of the population once they reach retirement age. It's funded via taxes paid by those still working.

Candid Fact The first state pension was introduced in January 1909 (The 'Lloyd George Pension'), although in those days the chances of the Government actually having to payout were slim - the retirement age was set at 70 even though a man's life expectancy at birth was only 50!

The retirement age is currently 66. Life expectancy at birth is now around 89 and 92 respectively for men and women (source: ONS cohort figs). However, the fact we're all living longer is one of the reasons the state pension retirement age is due to increase to 67 by 2028 and 68 by 2046 for both both sexes.

The state pension increases each year inline with the greater of prices, average earnings and 2.5%, a so-called 'triple guarantee'. The earnings link had been scarpped by the Thatcher Government in favour of prices in 1980, but was restored via the triple guarantee in April 2011.

What types are there?

Although there is now only only one type of 'flat rate' state pension, for those who retired before April 2016 it could be supplemented by the second state pension (S2P) and/or the pension tax credit.

Flat State PensionState Second PensionPension Tax Credit

This is the standard pension you'll receive at retirement age provided your National Insurance (NI) contribution history meets the qualifying criteria. If your contribution history falls short you could still receive a proportion of the basic pension.

Do I qualify?

You must work 35 qualifying years to enjoy the full flat State Pension. A qualifying year is a tax year where your income was sufficient that you paid National Insurance contributions (or you were treated /credited as having paid them).

If you have at least 10 qualifying years you could receive a proportion of the flat state pension. You also normally have the option to 'buy-back' weeks/years to plug gaps in your NI contribution record, via NI Class 3 contributions. The current rate is £17.45 per week, making this a generally good deal if you fall a little short of the period needed to qualify for a full basic state pension.

How much will I get?

The current flat state pension is £203.85 per week. If you reached retirement age before 6 April 2016 then you would be in receipt of the 'old' basic state pension of up to £156.20 per week (plus any additional S2P/SERPS pension you may have).

Both state pensions currently increase with the greater of prices, average earnings and 2.5% each year. But what happens to the level of state pension long term is anyone's guess.

Can I delay taking my state pension?

Yes, and you'll receive a higher state pension in future if you do (or a lump sum equal to pension not taken plus interest at 2% above the Bank of England base rate). The extra pension you'll get depends on whether you reached state pension age before 6 April 2016 ('old' state pension) or thereafter (flat state pension).

Flat state pension'Old' state pension

You receive 1% extra state pension in future for every 9 weeks you defer it, equal to an extra 5.8% if deferring a year.

What happens if I die?

State PensionState Second Pension

Your state pension dies with you.

Things can only get worse?

The outlook for the state pension is pretty grim for two main reasons:

  1. It's funded by those still working. While there are currently three workers to fund each pensioner, by 2050 it is expected there will be just one. You do the math...
  2. We're all living longer, on average, hence drawing a state pension for longer too. Life expectancy is predicted to continue increasing.

Unless these trends reverse then it's inevitable that future Governments will either have to continue increasing the retirement age and/or increase taxes if the state pension is to be preserved at it's current level of around 15% of average earnings.

State Pension Jargon

Here's some of the more common state pension jargon you might come across:

Pension Tax CreditA state benefit that's effectively a minimum income guarantee for those age 60 and over.
S2PState Second Pension, a 'top-up' to the basic state pension (for employees only) based upon NI contribution history and earnings over your working life.
State PensionA weekly income paid by the Government to the vast majority of the population once they reach retirement age.