State pension myths

There are many misconceptions about the state pension including: “It’s my personal pension pot” It isn’t. Today’s workers fund today’s pensioners through National Insurance contributions. “The State Pension is tax-free” — Wrong. It counts as taxable income, so you may pay tax if your total income exceeds the personal allowance. “It’s enough to live on comfortably” — The full new State Pension below the UK’s estimated minimum retirement living standard. “I’ll get it automatically” — You usually need to actively claim your State Pension once you reach State Pension age. “Everyone receives the same amount” — Your entitlement depends on your National Insurance record. Typically, 35 qualifying years are needed for the full amount. “I have to take it at 67” — You can defer claiming, potentially boosting payments by around 5.8% for every year you delay.

I hear from many people who wrongly believe that the state pension should be enough for them to live off and are shocked when they discover it isn't. Somehow, they haven't seen that over £31,000 is needed to live a moderate lifestyle in retirement, and a private or workplace pension needs to make up the bulk of that. That figure won’t be the same for everyone, but it is worth estimating your costs in retirement, as a specific figure will help you work towards an end goal and set better expectations.

Another major misconception I come across is people who believe they are automatically entitled to the full amount of the state pension and are shocked when they aren't. This isn’t clear cut; you need to have built up 35 years' worth of national insurance credits to be eligible. If you are short, there are ways to earn this credit, such as through Specific Adult Childcare Credits if looking after a grandchild, and each extra credit can be worth more than £350 a year to your pension.