15 DEC 2023

The UK State Pension - What's it worth?

We hear a lot about the State Pension not being enough to live off in retirement, and any mentions of unpicking the ‘triple lock’ are always hugely unpopular. But do any of us understand how much the State Pension is actually worth?

 

For those who have built up full entitlement, UK State Pension is £203.85 per week in 2023/24. That’s just over £10,600 per year. 

 

Based on current best buy annuity rates*, if you wanted to ‘buy’ an annual income of the same value as the state pension, you would need £240,836 in your pension pot. It’s worth noting that over the last 2 years annuity rates have increased dramatically (more than 50%), which means that if you had wanted to ‘buy’ the state pension just 2 years ago you’d have needed half as much again in your pot – not a small sum by anyone’s standard.

 

So although the State Pension alone is unlikely to provide a comfortable standard of living in retirement, it’s a very valuable starting point. 

 

For those unlikely to benefit from full UK State Pension (perhaps those with less than the 35 qualifying years required), it’s worth thinking ahead and considering saving more into your personal pensions to bridge the gap. In broad terms, a qualifying year is one in which you worked and earned enough to pay National Insurance, or to qualify for a credited year, or where you have been credited with a qualifying year where you were in receipt of certain state benefits based upon illness, disability, caring responsibilities or unemployment. You need a minimum of 10 qualifying years in the UK system to build up any State Pension entitlement – those with between 10 and 35 years will receive a proportional amount of pension.

 

Expats and those with international careers are a particular group that need to consider the ‘cost’ of not benefiting from a full UK State Pension, as they may not spend enough years in the UK system to build up 35 qualifying years. For these individuals, it’s vitally important that they factor into conversations with their financial advisers the question of pension adequacy – are their own long-term savings going to be sufficient to fund them through their later life? Addressing this early is key; as we highlight here, the value of the State Pension is not a ‘cheap’ thing to replace, and the younger you start considering whether your own savings are on track for the retirement you will expect the more chance you have of successfully being able to maintain your desired lifestyle. 

 

 

* Annuity Rates: View Best Annuity Rates from the UK Market (hl.co.uk) Rates based upon a 65 year old purchasing a Single Life, annuity, escalating by RPI, with a 5 year guarantee, assumed that the full value of the pension pot is used to purchase income (no PCLS).