Don't underestimate the value of the State Pension


Despite an amendment in the House of Lords to retain the earnings link of the triple lock next year, MPs in the House of Commons rejected the move. The wage element has therefore been suspended for 2022-23 following a substantial rise in wages due to the pandemic.

The ‘triple lock’ ensures State Pension benefits rise by the highest of either CPI inflation,  average wage increase or 2.5%. Linking it to wage increase could have seen a rise of 8%, therefore, it is likely it will rise by inflation.

The State Pension has made many headlines over recent years, with most stating doom and gloom for those who are looking to retire in the future, and with the ever-increasing age at which the State Pension can be claimed, you could be forgiven for thinking that the state pension is not worth relying on in retirement.

The value of the State Pension should not be overlooked as this forms a critical part of a retirement income for nearly all retired households, it will certainly be missed if it is not there.

When producing retirement cashflow forecasts, many people we speak to become more aware of their reliance on the State Pension, with fewer people being able to rely on final salary pension schemes. The State Pension of course provides one of the key sources of “risk-free” income.

For those entitled to the full State Pension, you will receive a sum of £179.60 a week, or just over £9,339 a year. For a retired couple, two State Pensions would therefore provide the household with over £18,678 of risk-free income each year. For many, this will allow them to cover a good proportion of their expenditure, with any additional income requirements usually being generated from personal pensions, investments or maybe from a rental property.

The Pensions and Lifetime Savings Association, in their Retirement Living Standards research, found that for a couple to retire on a “moderate” standard of living (outside of London), a household income of £30,600 a year would be needed. For a single person, or for someone who may have been widowed, this sum is £20,800 a year.

Whilst the State Pension hopefully meets a proportion of the income requirements for a married couple, there is one very real danger to retirement income. That is the death of a spouse or partner. Under current legislation, if you receive the State Pension these payments have to cease on death, thereby leading to a fall in household income for the survivor. It should also be considered that other sources of retirement income may also reduce or cease, and therefore it may be important for some people to ensure that plans are in place to cover the loss of income.

Similarly, it is as important to ensure that plans are in place to protect the future State Pension receipts even if you have not yet retired. Every person who has worked through their career will have had National Insurance payments deducted from their salary/profits for the duration of their working life. Sadly, if they pass away before retirement age, then no State Pension will be payable. In October 2020, the State Pension age rose to 66, and the average life expectancies for a man and woman are 79 and 83 respectively, according to the Office for National Statistics. 

Based on current average life expectancies, the State Pension for a male, in normal circumstances, could be paid for 13 years, providing £121,407 of income per person (without allowing for any inflationary increases), and for those who pass away before the state retirement age, this is a large amount of income for the survivor to try and replace, or partially replace, depending on the lifestyle they are still aiming to achieve, from other sources or investments.

Thankfully, there are ways in which you can ensure that in the event of your death, your husband, wife, or partner does not suffer this significant loss of income in retirement - you can secure a similar level of income through the use of life assurance for a relatively low cost. Life assurance is often discounted by many as not being a necessity and is rarely considered in retirement, but it is extremely valuable should your retirement planning not go “to plan”. Sadly most only miss not having cover until it is too late and have to make significant changes to their retirement plans as a result.

For many people, the State Pension will form the backbone of their retirement plans. The loss of State Pension income could have a profound effect on the retirement plans for the survivor, but by arranging a full financial plan, and having the right financial protection in place, you can be assured that you will continue to have enough income to retire on, whatever happens.

At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind, we work with you to help build your retirement plans with regular reviews so you can remain on track and enjoy your later years.

Please get in touch if you would like to discuss your plans for retirement with a member of our financial planning team.

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