Relying Solely on The State Pension for Your Retirement? Reading This Might Make You Think Again.
Merely glancing at the current State Pension rates, and it should be clear that it’s unlikely to provide sufficient financial support for your retirement. You should see the State Pension more as a foundation to your retirement income, rather than relying on it solely.
Unfortunately, many people are financially unprepared for their post-working life. This situation is widely accepted as being a ticking time bomb that will result in an explosion of poverty in retirement.
Therefore, you must put sufficient financial provisions in place for when you retire. First, though, let’s look at the State Pension in more detail.
The State Pension
The State Pension was introduced as part of the 1948 National Insurance Act. Back then, there was a difference in the qualifying ages of men (65) and women (60). However, today there is parity, with 65 being the qualifying age for all.
You contribute to the State Pension by making National Insurance contributions throughout your working life. Although this is the same principle on which the State Pension was founded, today we live longer, so the pot has to be spread more thinly.
To offset the effects of social and inflationary pressures on the State Pension, the government introduced a triple-lock protective system in 2010. This measure guaranteed that the State Pension would rise annually at the same rate as either average earnings, inflation, or 2.5%.
Something crucial for your understanding is that the State Pension was designed in a different era. It was introduced following WWII to provide support for people in their old age. The State Pension may have been sufficient then, but today the situation has changed considerably, meaning it is unlikely to support you solely in your retirement.
One of the most significant societal changes between now and the introduction of the State Pension is that we live much longer than we used to. The result is that the State Pension pot has to be stretched further. On top of this, there have been considerable advances in health and medicine, meaning that we are more active during our retirement and want to do more. Thirdly, our aspirations have soared compared to the relatively modest ones of our predecessors.
The pressures these changes have placed on the State Pension are substantial. It means that the State Pension is unlikely to provide you with a realistic income for your retirement.
Your State Pension Rate
Although the State Pension is unlikely to meet your entire retirement needs, it is an excellent supplement to your income. Therefore, it is crucial to understand how much pension you will receive.
Not many people have only one employer during their working lives, and multiple employments are more likely. You also may have periods of self-employment, health issues, or unemployment that create gaps in your National Insurance contributions.
To check the predicted rate of State Pension you’ll receive, and when you are likely to receive it, you can go to the gov.uk website. Here, you can also check any gaps you have in your contribution so that you can take any action needed to fill these.
Other Forms of Retirement Income
Hopefully, now you understand that the State Pension is a foundation for your retirement income rather than a sole provider. So, what other forms of income might you have, or can you set up for your retirement? Here are a few:
These are private pension provider schemes into which you make voluntary contributions regularly. The provider will invest your money throughout the pension so that it grows and can provide you with an income during retirement. Private pensions account for the most significant proportion of retirees’ pension funds.
2. Workplace Pensions
Your employer provides these pensions, and you pay a small proportion of your salary to them each month or week, depending on your pay schedule. The schemes are set up by employers who set up an agreement with pension providers to invest your money to grow your pot.
In 2008, the government introduced auto-enrolment whereby qualifying employees would be automatically enrolled into a workplace pension. The qualifying criteria are as follows:
Salary over £10k.
You pay 4% of your gross salary into your pension, and another 1% supplements this in government tax relief. Your employer is legally required to contribute at least 3% of the value of your gross salary, bringing the total amount going into your pension pot equivalent to 8% of your gross salary.
You have the option of leaving your workplace pension scheme, but before deciding to opt out, think about it.
3. Continue Working
Your dream of retirement may be lazing on a sun-drenched beach doing very little, but the reality is likely to be much different. Many people find they want to keep working, either full-time or on a part-time basis.
Our work environments provide us with more than just an income. They are the place we spend most of our time, make friendships, and work towards shared goals. So, retiring from this completely can be a challenge. Therefore, many people decide to keep working into their previously anticipated retirement years.
Continuing to work will benefit you financially. Not only will you continue to have an income, but delaying your retirement means that your pensions will continue to grow, and you could receive a higher level of State Pension. However, there are non-financial benefits, too, including improved mental health and a more active social life.
Windfalls and Investment Returns
You may well receive other forms of income during your retirement or as you approach it. These can include maturing investment, windfalls, inheritance, or gifts. You should consider all forms of income when planning your retirement, and you can get help with this from a regulated financial adviser.
The State Pension is an excellent foundation for your retirement income. Remember that the amount you receive from this benefit depends upon the number of years you have paid into it. Therefore, you should ensure that you make as many National Insurance contributions as possible to maximise your payback.
Retirement is inevitable, so you should embrace it rather than resist it. Try to envisage the lifestyle you want for retirement and what that lifestyle will cost you. The sooner you do this, the more likely you’ll be to achieve your dream retirement. Don’t rely merely on the State Pension to support you; speak to a financial adviser and get your retirement income on track.
Before thinking about your pension, get in touch with a regulated pensions specialist like Portafina or, view the information at Money Helper.