Pension Planning Beyond the State Pension

The State Pension is a useful and, for some, crucial regular payment which can be claimed from the government on reaching State Pension age.

However, for many individuals, particularly those with a high net worth, the State Pension is largely a useful supplement to other income—including private income from personal pensions and from using your pension pot to provide income drawdown from funds—and as such should be factored into broader pension planning. By taking early advice as to how the State Pension can be integrated into your wider retirement investments, you are more likely to ensure that your savings and strategy align.

For some investors, the State Pension might seem relatively insignificant at first glance. But by understanding how it works, how much you'll receive and when you'll begin to draw benefit, you can understand how it will affect your cash flow and other investments. This can help inform other retirement decisions you make, including the questions of when to retire, how to approach your personal pension and retirement savings and how to best manage your wider investments and tax concerns.

The State Pension

Before you begin the process of pension planning for your retirement, you should be aware that your age, gender and National Insurance record affect certain aspects relating to your State Pension, including how much you'll receive and the date at which you'll be eligible to start receiving it.

If you have not made full contributions, you have the option to "top-up" by making voluntary contributions, but it is recommended that you take financial advice before topping up to see if this will be the best use of your funds.

Entitlement is determined by your national insurance record because your pension is, in effect, a repayment on contributions you make during your working life—whether you are an employed, self-employed, full-time or part-time worker. Pension payments will be made to you on a weekly basis once you reach State Pension age.

The pension rules changed on 6 April 2016, making it easier to determine eligibility. Prior to this change it was a vastly more complicated process and this made saving and retirement planning more difficult.

There are a number of factors that can cause the pension amount to differ for different people. These are:

  • The number of years you make contributions.
  • How much you earned.
  • When you decide to start taking your State Pension.

Your pension payment through the state scheme will not be affected by any other pension savings you may have.

How Much Will You Receive

As it stands, the maximum amount a single person can receive under the State Pension is £164.35 per week (in 2018/19). Important factors affecting entitlement include the following:

  • If you have made 35 years or more of National Insurance (NI) contributions, you will get the full amount.
  • If you have only between 10 and 34 years of payments, your entitlement is calculated as a proportion of the full amount.
  • If you have fewer than 10 years of NI contributions, you are ineligible.

If you would like to check out your national insurance contribution history and “pension age” as well as an estimate of how much you are likely to receive, you should visit  www.gov.uk/check-state-pension. If you are over 50 you can request a paper statement instead.

The Limitations of the State Pension

Although the State Pension is periodically adjusted for inflation, for many it is unlikely to provide sufficient funds to cover the full cost of your desired retirement lifestyle. The full State Pension is £164.35 per week, which equates to £8,546.20 per annum. If either your retirement goals or current level of expenditure exceeds this, you will need to plan other ways to fund your retirement. In reality, the State Pension is a useful safety net for all. However, it cannot be relied upon to cover all of the following potential retirement costs:

  • Day-to-day living expenses: For example, food, housing, vehicle expenses, utilities, etc.
  • Holiday and travel expenses: Free time to travel can be a great pleasure once you retire.
  • Financial help for dependents: Perhaps a mortgage deposit for children or education fees for grandchildren.
  • Medical expenses: Although the National Health Service is a great boon for UK patients, being able to afford to "go private" in later years can be a huge advantage.
  • Care expenses: These are sometimes unavoidable and can quickly take their toll on your savings and level of income.

One downside to the State Pension's weekly payment scheme is that it does not offer capital flexibility. If you rely on this as your sole retirement savings plan and, once retired, an emergency means you unexpectedly need cash flow, it is completely inflexible. Nor does it allow for you to make one-off or “big ticket” capital expenses, such as paying for a cruise or home improvement.

And, of course, the State Pension is completely inadequate if you have goals beyond your lifetime such as providing for your heirs and/or leaving money to charity. Such goals require outside investments and are probably beyond any workplace pension or self-invested personal pension.

Lastly, although the State Pension will most likely survive in one form or another for some time yet, there is no guarantee that it will exist ad infinitum. In 2017 it was revealed by the Government Actuary’s Department that the balance of a fund that pays the State Pension was expected to “fall rapidly to zero around 2032”. Although this most probably means that workers under 50 will simply have to pay more in National Insurance contributions to maintain their State Pension, it does help explain why in 2014 the Centre for Policy Studies advised workers in their 20s and 30s to plan for a retirement without the State Pension.

Plan Your Investments for Flexibility in Your Retirement

In order to give yourself the best chance of a comfortable retirement there are a number or retirement planning tools which can be of benefit when pension planning and choosing retirement accounts—for example, private pensions, property, employer-sponsored pensions, tax-efficient savings schemes and investment portfolios.

A pension adviser can help you plan in this regard, giving you confidence that all of your investments and pensions are aligned to help you achieve your goals. A good adviser can help you decide what to invest in and help you choose between the numerous pension schemes and how they will provide retirement income for your needs. Your financial adviser should be able to explain how to make the most of your pension tax relief—for higher-rate and basic-rate tax payers. They should also help you stay focused on your long-term investing plan and how you should take distributions from your investments.

Contact Fisher Investments UK Today

If you would like to learn more about pension planning, including how planning your investments can help supplement the State Pension in retirement, talk to Fisher Investments UK today.