I wish we could all rely on the State Pension, I really do. But we can’t. If you are banking on that to fund your retirement, you’ll be in for a shock when you finally claim it.
Rotten rules First, it isn’t enough. The new State Pension pays annual income of £8,767.20 a year, a third of the average national full-time salary. And you only get that if you qualify for the full amount, having made 35 years of National Insurance (NI) contributions.
Also, the rules are changing all the time, and not in your favour. That NI qualifying period was initially 39 years for women, and 44 years for men, before being slashed to 30 in 2010, then hiked back up to 35 in 2016.
State Pension age is currently being pushed back to 66 for all, which means millions of women will have to work six years longer than they expected. Then it will rise to 67 between 2026 and 2028, and most likely keep climbing after that.
Poor show Pensioners do benefit from a valuable triple lock, but as I wrote recently, it’s an expensive commitment and could come under attack.
Now it faces yet another squeeze. If you are claiming the State Pension but are married to someone who is currently too young to claim, you may now be up to £7,000 a year poorer.
It’s complicated to explain, as the State Pension often is. Pensioners on low incomes can claim a means-tested top-up called Pension Credit, which lifts their overall income to a minimum level. This is worth up to £13,273 a year in some cases.
Mixed results Until recently, couples could claim this when the elder partner reached State Pension age. Now both must have done so. Mixed age couples will have to claim Universal Credit instead, which pays at most £5,986, leaving an estimated 60,000 couples up to £7,000 worse off.
The Government can do this type of thing. The State Pension is often seen as a safety net to avoid people ending up in absolute poverty in retirement but as you can see, it is full of holes. Which is why you need to build your own financial cushion.
If you have built up a company or personal pension, or other investments such as a Stocks and Shares ISA, you will have money in your own name, which you can fall back on if the state no longer provides as you originally hoped.
Get saving now There are plenty of ways of doing this. Your first port of call is a company pension, if you have one, as you will get employer contributions and tax relief on top. You can also claim tax relief on personal pension contributions, although many people favour a Stocks and Shares ISA. Your payments-in do not attract tax relief, but all subsequent income and growth will be tax-free for life. And you can save up to £20,000 a year.
The next step is deciding where to invest. This is where Motley Fool comes in. You can make investing as simple or as complicated as you want it to be. A FTSE 100 tracker could be the best place to start weaning yourself off State Pension reliance.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019