Annie Shaw looks at how you can make the most of the state pension
With as many as one in four older people depending on the state pension for the main part of their retirement income, and one in seven having no other income than what the state provides, it is not surprising that making ends meet in later life can be hard for many.
The key to a worry-free retirement is to plan ahead. The best way to make sure you’ll have enough income for later life is to set aside money while you’re working – usually through an occupational or private pension plan.
But if you don’t have much if any pension savings, you might be able to boost the amount you get from the state.
Check your entitlement
If you have not already reached State Pension Age, request a State Pension statement, check that your National Insurance record is complete and up-to-date, and get a forecast of how much State Pension you can expect.
Check the government’s state pension website for more details. In order to receive the full £155.65 a week New State Pension, introduced in April 2016 month for men born on or after 6 April 1951 and women born on or after April 6 1953, you will need 35 years’ contributions.
Claim National Insurance credits
If you have gaps in your National Insurance Contribution history, you may be able to fill them with credits.
You can get credits by being treated as having made contributions for periods of unemployment, illness and disability, and for periods looking after children or other caring. Contact HMRC if you think your National Insurance record is wrong.
You don’t have a choice about paying National Insurance if you are working and still below State Pension Age, no matter how many years you have contributed in the past.
Your employer will deduct contributions from your pay, provided you earn above £155 a week, along with tax. But if you have a contributions shortfall you might decide to work longer, instead of taking early retirement, in order top-up or complete your contribution history.
Once you have reached State Pension Age you don’t pay NI any more, even if you continue to work, and can’t increase your State Pension entitlement this way.
Make voluntary NI contributions
If you are still below State Pension Age, have stopped working and have a National Insurance shortfall, you can also pay voluntary contributions to boost your record.
Defer taking your pension
Many people believe ‘a bird in hand is worth two in the bush’ and want to draw their pension as soon as possible, even if they don’t need the money immediately, and simply put it in the bank. But not drawing your pension straight away can have significant advantages.
If you defer taking the New State Pension, you eventually receive a boost of around 5.8% for each year you have deferred. This figure is ‘actuarially neutral’ – if you live to the average life expectancy, the amount you will receive over your lifetime will be the same as if you drew the smaller amount sooner.
The big advantage of deferring is that, if you have an alternative source of income now – perhaps you are still working – you can receive a higher pension later when you stop earning. But you do run the risk of losing out if you were to die unexpectedly young.
According to figures recently calculated by insurer Aegon, it would cost around £250,000 to buy an annuity that would give the same index-linked and guaranteed lifetime pay out as the New State Pension.
Because everyone’s circumstances are different, if you are not sure what you should do it is a good idea to discuss your options with someone, such as a financial adviser, who understands the rules and can do the maths.
Buy more state pension
People who reached state pension age before 6 April 2016 can buy more pension by making special contributions, known as Class 3A.
The maximum top-up on offer is £25 extra a week – worth £1,300 a year for life. Under the offer, which lasts until April 2017, this would cost a 65-year-old £22,250.
To work out how much extra income you can buy and how much it will cost, use the Government’s pension top-up calculator.
Once again you need to be aware that you are giving up capital – which you could potentially spend as and when you like – in exchange for a secure future income, which would be wasted if you died unexpectedly.
Claim benefit entitlements
Many people of state pension age don’t claim all the benefits they are entitled to.
According to the charity Independent Age, which offers advice and support to older people, two-fifths of people have never checked to see if they’re eligible for help such as Pension Credit, which can not only boost your weekly income but also open the door to other benefit, such as Housing Benefit and Council Tax Support.
The charity reckons that those failing to claim the benefits they are entitled to are missing out on an average £41 per week or £2,100 a year.
Check your entitlement to benefits using the online calculator or call 0800 319 6789 to receive a copy of Independent Age’s free Moneywise guide or to arrange a free benefits check.
There is also more information on claiming Pension Credit, including an online calculator.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.