The full rate of the new State Pension is currently £203.85 per week, or c. £10,600 per year. It’s payable from age 66, due to rise to 67 by the end of 2028.
The State Pension is protected by the so-called ‘triple lock’, which means it will increase each year by the higher of 2.5%, September’s CPI inflation measure, and average annual wage growth between May and July (including bonuses).
Under current rules, it is set to increase by a further 8.5%(average earnings growth) to £221.20 per week as of next April, although there’s speculation that this might be trimmed to a still reasonable 7.8% (the earnings growth figure could be reduced to remove the impact of a one-off bonus to NHS staff), which would see it at £219.75 pw / £11,466 per year. Let’s assume the latter.
(Triple) lock stock and three smoking barrels
What’s been driving past State Pension increases?
As a bit of side note, before trying to value the new State Pension, it’s interesting (if you're dull like me) to explore what has driven past increases, i.e. which element of the triple lock has been most dominant?
The chart below illustrates the annual increases in the State Pension since the introduction of the triple lock in 2011, and which index was used - inflation, earnings growth or 2.5%.
As you can see, it switches between the three factors –inflation has driven the increase on five separate occasions, vs four each for earnings and the 2.5% floor.
There has long been speculation that the triple lock could be ditched, given just how expensive it is to maintain – soon to rise to £9bn a year according to ‘PensionsAge’ – the “leading pensions magazine”.
But what if earnings growth was removed from the equation and the State Pension increased simply by the higher of inflation and 2.5%? The chart below shows how the State Pension would have evolved (vs how it actually has):
As you can see, the two are near identical. That’s because earnings growth has only driven a rise in State Pension on four occasions(including the projected 2024 increase) and even when it has, it tends to be only slightly higher than inflation (this is unsurprising, as higher inflation tends to lead to increased wage demands, and vice-versa).
Put another way, switching from a triple lock to double lock, would seemingly make little difference.
Valuing the State Pension
How much is a full State Pension worth?
Or more precisely, how much would you need to save in a standard ‘pension pot’ to replicate a full State Pension.
On current annuity rates, and assuming any pension income increases at 3% per year (it’s impossible to replicate the exact mechanics of the triple lock), a 66 year-old in good health would need to build a pot worth c. £211k to secure an income of £11,466 per year, payable for life.
Planning opportunities
You may be able to purchase additional State Pension entitlement
The key point above is that the State Pension is highly valuable, equivalent to a pension worth over£200k, or £400k for a couple.
In terms of planning opportunities, for those that aren’t on track to receive a full State Pension (generally where you have less than 35years’ worth of National Insurance credits or contributions), it may be worth exploring whether there’s scope to top this up via voluntary contribution in order to boost your State Pension income.
Normally, you can only ‘back fill’ the last 6 years, however, HMRC currently allow some to go back as far as 2006 – this was a temporary ruling which was due to come to an end in July 2023, but has since been extended to 5th April 2025.
Furthermore, the maths stack up nicely here – for the 2023/24tax year, the cost of purchasing an extra year’s worth of entitlement, equivalent to an additional c. £303 income per year, is around £907. That’s equivalent to a 3-year breakeven (i.e. you’d need to survive 3 years beyond State Pension Age before the income exceeds the cost) or a 33% annuity rate (the effective annual return on investment).
To assess whether you’re eligible to do this, the first thing to do is check your entitlement, which you can do via the government website: www.gov.uk/check-state-pension.
Already receiving State Pension?
Even if you’re already receiving your State Pension there may still be scope to top this up (assuming you’re getting less than the full entitlement and have gaps in your NI record dating back to 2006).
You won’t receive any backdated payments, but you can still boost future guaranteed income via top-up. The process is slightly different –you’d need to contact the Pension Service rather than the Future Pensions Centre, but the benefits are the same.
Let me know if you want to discuss this in more detail.
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