When you reach retirement age, you will be entitled to receive certain payments from the government. In the UK this fund is called the state pension, and it is based on your national insurance contributions across your working life. This is why it is so important to keep paying in!
But how much is the state pension? The amount you could receive from the government has changed over the years. Therefore, it is always worth keeping an eye on current government standards and rates.
The amount you could receive from your state pension will vary. In this guide, we will take a close look at how state pension is calculated, how much you are likely to receive and what the major variables are.
How Much Pension Do I Need To Live Comfortably?
Understanding how much pension you need isn’t something that is particularly easy to work out. It’s a good idea to make sure you have your expenses clearly detailed – however, it is ultimately the government, and your national insurance contributions, which will determine what you get.
You can build up a further pension pot with private contributions, too. All UK workplaces are now legally obliged to match any payments you make into commercial schemes. This is where a fraction of your income each month will be deducted and put into a safe hold.
If you can easily determine how much pension you will need once you retire, you may be able to work out how much per month you would like to contribute. This fund will be unlocked once you reach the appropriate pension age, and will be added to your state income.
But how much pension could you receive from the government? Let’s take a closer look.
How Much Pension Will I Get?
Understanding how much pension you will get from the state fund is fairly simple if the majority of your work was contracted in. The rules to state pension funding changed as of the 6th April 2016. If you were of state pension age before this date, you may still be entitled to the full weekly pension amount of £129.20. This, in effect, means you will be entitled to up to £6,718.40 per year.
If you reached state pension age on or after the 6th April 2016, you may be entitled to the maximum fund of £168.60 per week. This, however, is now affected by a couple of additional factors. One of the major factors affecting state pension eligibility is national insurance contributions.
Contracted In or Out?
Providing you have paid your contributions in full while ‘contracted in’, you stand a chance of receiving the full pension fund available to you. If you worked on a ‘contracted out’ basis, you will have been paying reduced rates of national insurance at some point during your career. Naturally, this will have had a knock-on effect for your pension pot.
Your pension is calculated based on how many years of national insurance you have paid for. If it is calculated that you have paid enough contributions to receive more than the upper limit, you will receive the maximum fund available to you. It is always worth consulting a UK state pension calculator to make sure you are fully prepared.
How Much Pension Do You Need to Retire at Age 55?
Regardless of how much you earn and put aside for your pension during your lifetime, you will only be able to unlock your state fund once you reach the government-mandated retirement age. We will cover this in a little more detail below.
The same will generally apply to private pension funds, though in some cases, you will be able to retire before the age of 55 if you have sufficient capital available. Some firms may encourage early retirement plans, where you can leave work before the mandated age. You will then likely be compensated. This will vary from firm to firm, which means you will need to check your own company’s specific policy.
When Do I Get My Pension?
You will be able to unlock and benefit from your state pension when you reach what the government has deemed to be the official ‘retirement age’. This, to some unpopularity over the years, has gradually been rising.
Up to 2020, the retirement age for men and women has been 65 and 60 years old respectively. However, if you were born on or after the 6th December 1953, both men and women will be expected to retire at 66 years old.
This retirement age is going to apply all the way up to 2029, where it is expected to rise again. You’ll need to be 67 years old to retire. By the late 2030s, this will be expected to rise once more to 68 for both men and women.
You may be able to unlock private pensions early. You’ll need to check this with the firm you work for.
Do You Pay Tax on State Pension?
How much is state pension without tax? While the government fund is liable for income tax to be applied on top, it will be paid to you before any contributions are deducted. You won’t have to pay tax on your pension if you receive less than the yearly personal allowance set by the government. This will change from year to year, but as an example, in 2022 the allowance is £12,570.
If your pension comes in at less than this per year, you won’t have to pay any tax on top. Bear in mind, too, that you won’t be expected to pay national insurance once you have retired.
How Much is the State Pension for a Married Couple?
The good news for married retirees is that the rate of pay will double if you are both of retirement age. Therefore, for example, you could stand to get £13,436.80 per year under the old rates, and a maximum of £17,534.40 per year under new rules.
How Much is Widow’s Pension?
While asking ‘how much is state pension’, we also need to take into account widows’ rates. The Widow’s Pension is now called Bereavement Allowance, or BA. This fund will allow to claim state benefits for up to a year from the date of your partner passing away. This applies to civil partnerships as well as marriages.
Depending on your age at the time of your spouse’s death, you could receive a maximum amount per week between £35.97 and £119.90. The minimum age to benefit from the allowance is 45 years old.
Other factors will impact how much you receive from BA, too. The maximum amount of money you could get per week will change depending on the contributions your spouse made towards national insurance. If, for example, they worked on a contracted out basis, or didn’t make full contribution payments, you may not be entitled to the full fund available.
Do also bear in mind that Bereavement Allowance can impact on other types of benefit. This means welfare such as income support could be cut back. Do make sure you discuss matters with a DWP (Department for Work and Pensions) representative before you get started.
What is Pension Credit?
Pension credit could be a great way for you to increase the amount of money you get from your state pension. Consider it a bit of a top-up of sorts. Anyone over the state pension age could benefit from various perks and additional funds. It’s also worth mentioning that pension credit recipients will be the only people over 75 years old who won’t have to buy a TV license.
But what is pension credit, beyond the basic top-up description? Pension credit is split into two parts. One, called guarantee credit, is offered to pensioners who earn less than a certain amount per week. The other, savings credit, is based on how much you have available in any savings accounts or ISAs.
About Guarantee Credit
Guarantee credit can be granted to pensioners who have less than £167.25 per week paid into their accounts. This is a means-tested credit, which means government officials will need to take a look at how much you are earning across the board.
Couples who are earning less than £255.25 per week will be able to claim guarantee credit, too. The amount you could receive on guarantee credit will top you up to this amount. Therefore, it may be a good idea to look into whether or not you are eligible. It’s estimated that millions of people could be missing out on pension credit and are simply not aware of the fact.
The government will take into account any current state pension you may be receiving, as well as any additional income on top. Beyond this, they will also look at investments and savings (should they come to more than £1000 in total).
About Savings Credit
Savings credit is a little bit different. This part of the pension credit benefit will allow you to claim back a little extra on top of your income per month if you have already been saving for your own retirement fund.
You will need to earn at least £144.38 per week (or £229.67 per week as a couple). The maximum amount you could receive from this half of the pension credit will be £13.73 (or £15.35). Do also bear in mind that you will only qualify for savings credit if you were of state retirement age as of 6th April 2016. Anyone reaching retirement age beyond this date will not be eligible to qualify.
How Much Can You Have in Savings for Pension Credit?
One of the big factors which can affect pension credit is your savings. Ultimately, if the government feels you have enough put away in savings to fall back on, they will not grant you any extra welfare on top. This is to ensure that only those who could stand to benefit from extra financial help receive the funds they deserve.
You are allowed to have up to £10,000 in savings before the government will start taking said money into account with regard to pension credit. Savings can include anything you may have already invested in assets or a portfolio of stock, so do make sure to be extra careful when applying for the credit for the first time.
It’s unlikely that many people claiming for pension credit will have more than the £10,000 limit saved, however. The government works out that for every £500 above the £10,000 mark, you earn an extra £1 per week of income. It is always recommended that you try and calculate how much you could be earning from pension credit, and whether or not you are eligible, with an online service.
UK State Pension Calculator
How much is state pension for you? Could you stand to benefit from pension credit if you’re having trouble earning a certain amount of money per week? The best way to find out will be to consult a UK state pension calculator such as this one from Money Advice Service. It’s available for free, and will help you crunch some of the more crucial numbers to help you understand what you could and should be entitled to.
You simply need to know a few basic figures to get started. If you know your national insurance contributions – fantastic – otherwise, any income, savings or money tied up in assets or investments should also be accounted for. Consulting an online pension calculator is a great way to prepare you for your state pension and/or any credit you may be entitled to. Let’s be frank here – if you are entitled to it then you should be claiming for it.
The UK state pension fund is something millions of people rely on each and every week. If you have been making regular national insurance contributions, there is no reason why you won’t be able to claim back a healthy amount of credit each week.
Don’t discount looking into pension credit, either. If you only have a small amount of savings available, you may be entitled to receive a little bit of extra cash on top. It’s a great way to ensure you’re not strapped for cash when you should be looking forward to an easy, relaxing retirement.
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.