In 1908, the Liberal government enacted a law which has become the bedrock of modern social welfare in the UK.
The Old Age Pensions Act introduced, for the first time, a pension whose cost was borne by taxpayers. Originally means-tested, and restricted to those over the age of 70, it paid a weekly pension of five shillings a week (seven shillings and sixpence for married couples).
Back then, you also had to be a British subject for more than 20 years and of “good character” to receive the pension. If you were held in a “lunatic asylum”, had served a prison sentence within the last 10 years, or had been convicted of drunkenness, you were ineligible for the payment!
Fast forward to 2024 and the State Pension is now worth significantly more – even adjusted for inflation – and forms a key part of the income you’ll likely rely on when you retire. So, understanding how the State Pension works can help you to plan your later-life income.
Here are some useful facts about the new State Pension that you should know.
1. The full new State Pension pays just over £11,500 a year
If you reach the State Pension Age after April 2016, you’ll be eligible for the new State Pension.
The State Pension Age is currently 66 but will start gradually increasing again to 67 for those born on or after April 1960, from 6 May 2026. It is then set to rise to age 68 between 2044 and 2046 for those born on or after 5 April 1977.
The current full new State Pension is £221.20 a week, equivalent to just over £11,500 a year. You may also receive more in certain circumstances – for example, if you were contracted out or you paid into the Additional State Pension before 2016.
You can get a State Pension forecast on the government website and find out what you’re likely to receive.
While the State Pension may not provide enough for you to maintain your desired lifestyle in retirement, it will provide a useful, guaranteed income that will rise in line with the cost of living each year – and that brings us to…
2. The amount of State Pension you receive is protected by the “triple lock”
In 2010, the coalition government announced the “triple lock” – a measure to protect the real value of the State Pension. Under the triple lock system, the State Pension increases each April in line with the highest of these three measures:
- Inflation, as measured by the Consumer Prices Index (CPI) in the September of the previous year.
- The average increase in wages across the UK between May and September of the previous year.
- 2.5%.
For example, in 2024/25 the State Pension increased by 8.5%, based on the “average increase in wages” measure.
Labour has committed to retaining the triple lock for this parliament, so the State Pension will continue to increase each year in line with the cost of living or the working population’s income until at least 2029.
3. The State Pension is worth more than £280,000
The State Pension provides extremely valuable income, and recent research from Fidelity shows that it is also very expensive to replace. It is both guaranteed and (as you read above) protected against inflation – two advantages that are difficult to replicate in another way.
Indeed, Fidelity says that to recreate the benefits of the State Pension, you would have had to save:
- £223,434 to replace the same pension using an annuity, assuming the annuity payment increased by 3% each year to maintain its real value
- £287,560 to replace the same pension using drawdown, assuming a withdrawal rate of 4% a year.
To recreate the State Pension using drawdown, someone aged 30 and saving until their projected State Pension Age of 68 would have to contribute about £225 a month into a pension, assuming 5% investment growth after all fees.
And, considering the State Pension rises each year in real terms, these contributions would also have to increase every year.
4. You can boost your State Pension by buying additional years
To qualify for the full new State Pension, you need to have accumulated 35 “qualifying years” on your National Insurance record. You’ll need to have at least 10 qualifying years to receive any State Pension at all.
A qualifying year is one in which you were:
- Working and made National Insurance contributions (NICs)
- Receiving National Insurance credits (for example, if you were unemployed, ill or a parent or carer)
- Paying voluntary NICs.
If you’ve spent any time abroad, or out of work, or you were self-employed and had low profits, it’s possible that you may not have 35 qualifying years on your record. You can use the State Pension forecast service to check this.
Bear in mind that, if you are some years from retirement, you may reach 35 qualifying years before you plan to retire!
If you don’t think you will reach 35 qualifying years, it is possible to “buy” additional years by making voluntary NICs.
The cost of voluntary National Insurance for the 2024/25 tax year is £17.45 per week, or £907.40 per annum.
Each additional qualifying year works out to provide up to an extra £6.32 a week (or £328.64 a year) in State Pension. So, it would take less than 3 years to make back your voluntary contribution.
Buying additional years may not be appropriate for everyone, so taking advice about this can be beneficial.
5. You can defer your State Pension and receive a higher amount
One quirk of the State Pension that you may not know is that you don’t automatically receive it when you reach State Pension Age – you have to claim it yourself.
If you don’t immediately need to claim the State Pension when you are eligible – perhaps you are still working or have other income – you can elect to defer your payments. This may also be useful if you will drop a tax bracket when you decide to retire.
Your State Pension increases by the equivalent of 1% for every nine weeks you defer. This works out as just under 5.8% for every 52 weeks.
As a general rule, if you defer your State Pension you’d need to live for around 20 years after taking it to even out the amount you’d “lose” by deferring. So, calculations around your likely longevity, and your tax position at retirement, are likely to influence your decision here – again, a financial planner can help with this.
Get in touch
If you have any questions about how to create the income you need in retirement, speak to us now. Please contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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