How much would you need to put aside in order to receive the full state pension? The figures are in and they make a compelling argument to keep your contributions topped up.
Many, but not all of us, will be heading into retirement with the prospect of a full state pension to look forward to. And while, for some better off savers, a (currently) inflation-proof annual income of £10,600 might be dwarfed by other income flows, it still represents one of the best value investments you can make.8
That much we know because of figures recently published by Fidelity which show that to replace the current maximum state pension (available to those retiring after 5 April 2016) would cost £205,430. That’s based on buying an annuity at today’s fairly heady rates to replace the income provided by the State Pension.
The rates on annuities obviously aren’t static, but the rate currently available to a healthy 65-year-old is around 5.16%. And that’s with income payments escalating by 3% a year to combat rises in prices – not the full protection against inflation that the State Pension enjoys thanks to the “triple lock” (the promise to raise the payment by the greater of inflation, wage rises or 2.5%).
Drawdown comparisons
If you want to go down the alternative route of income drawdown, and withdraw your money at a standard conservative around 4% per annum over the next 30 years, you would need £265,005 of pension savings to recreate what a state pension will deliver. That’s even more than an annuity and without the guarantee that your income will last until you die, but with the benefit that the money in your drawdown “pot” remains yours, or passes to your estate.
Your entitlement to the state pension is based on your National Insurance (NI) contributions, and you’ll need 35 complete years to qualify for a full pension by the time you retire – although you can usually fill in some gaps afterwards. At present, the government has just extended the window to fill in missing years of NI from 2006 to 2017.
The government’s online service – https://www.gov.uk/check-state-pension – lets you check on your NI record for gaps. To use that service, you’ll need a government Gateway account, which you can sign-up for using details from your passport, payslips or P60.
To make an informed decision on whether to fill in your record, call the Future Pension Centre on 0800 731 0175 if you are not yet at pension age, or the Pension Service on 0800 731 0469 if you already at state pension age.
Are your retirement plans on track?
If you are on the road to retirement and wondering when (or even if!) you can afford to retire, and how much you will be able to spend each year without your funds running out, you might like to test out the “RetireEasy LifePlan”, available here: www.retireeasy.co.uk
It takes just a few minutes to securely enter your data, and then you can run scenarios on what would happen to your plans if you changed your retirement date, took on a part-time job, decided to travel the world or help out a family member – all in the form of easy-to-understand charts. It costs just a few pounds a month, and you can cancel at any time.
