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State pension ‘knowledge gap’: Key points to know ahead of retirement

State pension ‘knowledge gap’: Key points to know ahead of retirement
Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
21/05/2024
Updated:
22/05/2024

Understanding of the state pension system is “poor” across all ages, with many people struggling to explain basic aspects of how the system works. Here are six need-to-know points before you retire.

A year-long study to understand people’s views and expectations of the state pension has revealed “wide knowledge gaps” that have led to misconceptions about the system.

According to the research conducted by Phoenix Group, a fifth (22%) of over-55s who are not yet retired do not know their state pension age, while just three in 10 know how much it is worth.

Meanwhile, over a fifth (22%) of retirees also said they entered retirement unaware of how much they’d receive from the state pension, while a quarter (26%) didn’t know how to calculate their entitlement.

One in 10 retirees also said they didn’t realise that their National Insurance Contributions (NICs) determine the level of state pension paid in retirement. Another 10% of retirees said it wasn’t easy to find out how much of the pension they’d receive in later life.

In one “prominent misconception”, people believed that individual NICs are kept in a personal pot to be accessed when they reach state pension age.

However, in reality, it’s funded on a “pay-as-you-go” system by current taxpayers, Standard Life, part of the Phoenix Group, explained.

It added that the state pension recently rose by an inflation-busting 8% to £11,502.40 per year for post-2016 retirees.

However, one in seven are receiving less money from the state pension than expected. “This was a strongly held belief that impacted people’s views about the fairness of the system”, it added.

As such, it said the need for information is key.

Dean Butler, managing director for retail at Standard Life, said: “With this level of debate and some complex rules and terminology, it’s understandable that a significant proportion of UK adults lack knowledge around specific state pension details, such as the value of their entitlements and when they’ll qualify for payment.

“However, the state pension is a significant part of most people’s retirement income, and it’s clear that greater prominence and more accessible information is needed so people feel confident and can plan for their financial future.”

Here are Butler’s six pension need-to-knows:

1) What is the state pension?

This is an amount paid to you every four weeks by the Government once you reach state pension age. However, not everyone can get the full amount, and it might not be enough to live on by itself, therefore it’s important to know what yours might be, when you can claim it, and how it will stack up with your other retirement savings.

2) What’s the current state pension amount and how does NI influence it?

The current full amount is £221.20 per week for the 2024/25 tax year, £11,502.40 for the year – an increase of 8.5% from the previous tax year. However, the amount you’ll get depends on your NI record and how many qualifying years you have.

You’ll usually need at least 10 qualifying years on your NI record to get any state pension. You’ll need 35 qualifying years to get the new full pension if you don’t have a NI record before 6 April 2016.

In some circumstances, it’s possible to top up your National Insurance record, and your state pension forecast will highlight when this is an option.

“If you’ve reached state pension age and you’re on a low income, it’s worth checking if you’re eligible for pension credit. This tax year (2024/25), pension credit usually tops up your weekly income to £218.15 if you’re single, or your joint weekly income to £332.95 if you have a partner,” Butler says.

3) When can I get the state pension?

UK adults can currently receive the pension from the age of 66, but this is set to rise to 67 by 2028 and again to 68 between 2037 and 2039.

“You can use the Government’s calculator to check when you’ll reach state pension age. If you don’t want to take your state pension immediately, you can also choose to defer it. This means you could get larger payments when you do start claiming it, which might suit you depending on your circumstances”, he says.

4) How do I claim my state pension?

“You won’t get your new state pension automatically – you must claim it. You should get a letter no later than two months before you reach state pension age, outlining what you need to do.

“If you’ve not received an invitation letter, but you’re within three months of reaching your state pension age, you can still make a claim, and the quickest way to do this is online. To complete your claim, you’ll need the following details:

  • The date of your most recent marriage, civil partnership or divorce
  • The dates of any time spent living or working abroad
  • Your bank or building society details
  • The invitation code from the letter about getting your state pension.”

5) When will the state pension be paid?

After you’ve made a claim, you’ll get a letter about your payments, usually paid every four weeks into an account of your choice, and you’re paid in arrears. The payment day depends on your NI number, although you might be paid earlier if your normal payment day falls on a bank holiday.

  • If the last two digits of your NI number are 00 to 19, payment is on a Monday.
  • If the last two digits of your NI number are 20 to 39, payment is on a Tuesday.
  • If the last two digits of your NI number are 40 to 59, payment is on a Wednesday.
  • If the last two digits of your NI number are 60 to 79, payment is on a Thursday.
  • If the last two digits of your NI number are 80 to 99, payment is on a Friday.

6) Will the state pension be enough to fund my retirement?

Butler said: “The reality is there’s a significant gap between what you get from the state pension and what you may actually need or want in retirement. The state pension alone falls short of even a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association (PLSA), and because it only starts in your late 60s, won’t help to support you if you want to retire earlier.

“It should therefore only form part of your overall retirement plan, and so it’s important to fully understand how much you might need to save into your personal or workplace pension plan to potentially be able to afford the retirement you want. To give you some idea of this, try using a pension calculator, which can help you see if you’re on track.”

Related: Government urged to bring forward plans for WASPI compensation