Did you know that around 1.2 million people are “mostly reliant” on the State Pension? 28% of over 55-year-olds are completely dependent on it, with no other pension savings.
This raises the question: can you get by purely on the State Pension in retirement? Below, our Burnley financial advisers explain the State Pension’s advantages and limitations, laying out the case for having additional income streams in retirement.
We hope this information is helpful. For personalised insight and guidance into your financial plan and situation, please contact us to arrange a free, no-obligation consultation.
What the State Pension offers
In 2024-25, the full new State Pension provides £221.20 per week, or £11,502 per year. To get this amount, you need at least 35 qualifying years on your National Insurance (NI) record.
You need 10 qualifying years to get any income at all once you reach your State Pension age (66 in 2025). However, you may get more or less than £221.20 per week, depending on your personal circumstances.
For instance, if you have less than 35 qualifying years on your NI record, you will likely be entitled to a lower State Pension income. Conversely, if you defer taking your State Pension income, you could potentially receive more.
Advantages & limits
The State Pension has at least two great advantages for people in retirement.
Firstly, the income is indefinite. There is no chance of your State Pension income “running out” since it is backed by the UK taxpayer. This provides a lot of certainty and stability.
Secondly, the State Pension rises each year by at least 2.5% under the “triple lock” system. This helps preserve the spending power of the income, helping you keep up with living costs.
However, there are limitations to the State Pension. In particular, the income is unlikely to cover most individuals’ retirement expenses.
According to the Retirement Living Standards developed by the PLSA, a single person needs at least £14,400 per year for a “minimum” retirement (i.e. to cover essential costs). This is, of course, less than the full new State Pension of £11,502 per year.
Moreover, the State Pension does not always offer a good financial safety net to surviving loved ones. For instance, if a husband dies, his widow may be able to inherit an extra payment on top of her State Pension if specific requirements are met.
However, if she remarries, she will not be able to inherit anything.
Options for extra planning
In light of the two advantages above, it is usually worth investing in the best State Pension (i.e. building up 35 qualifying years on a NI record) to get the best income possible.
However, the limits of the State Pension highlight the need for most individuals to build up extra savings and assets for retirement.
Here, clients have many options to explore with a financial adviser. Here are some possibilities:
- ISAs. These allow for tax-free dividends, interest and capital gains. Each financial year, individuals can commit up to £20,000 to their ISAs. For retirement planning, the Lifetime ISA (LISA) may be worth exploring. Provided certain conditions are met, this allows the saver to claim a 25% boost to their LISA contributions from the UK government, up to a limit of £1,000 per year.
- Workplace pensions. These come in two main forms. The first is the “defined benefit” (or final salary) pension, popular in public service roles such as teaching and the police force. The second is the “defined contribution” pension (or pension “pot”). The first offers a guaranteed retirement income from your former employer. Under the second, both you and your employer make contributions to your pension pot under the auto enrolment rules. Both pension types can be powerful tools for building up extra retirement savings.
- Personal pensions. These are pension “pots” typically opened independently by individuals. For instance, someone might open a self-invested personal pension (SIPP) to consolidate their past workplace pensions and manage their savings.
Next steps
At Elmfield Financial planning, our Burnley financial advisers recognise that each client’s needs, goals and circumstances are unique. As such, a tailored approach is required when building a retirement plan beyond the State Pension.
For instance, a self-employed person may not have access to a workplace pension (which enjoys the “boost” from employer contributions). Therefore, it may be wise to open a personal pension or optimise an existing one to build up a retirement fund.
Another individual may be maximising their annual allowance and want to save more towards their retirement. In this case, other options like the Lifetime ISA may be suitable.
When building a retirement plan, it is also wise to consider how it will integrate into your wider financial plan. For instance, how will your pensions work in light of inheritance tax? How might your contributions affect your tax situation in the shorter term?
A financial adviser can help you work through these sorts of questions. If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
