How to ride out the changes to the State Pension

First published 03 November 2015 • Updated 25 July 2017

Imminent changes to how the State Pension works could leave you worse off in retirement. Here’s why relying on the state to support you in later life is a bad idea – along with seven tips on what you can do instead.

You may have heard that the new State Pension is going to rise. Or is it? You may also have heard that the new State Pension is going to fall. Which is correct? Are we going to be better off in the future, or are we going to be poorer? Will somebody please explain what’s going on?

Here’s the ‘State Pension Rises!’ story (the one the government probably wants you to notice). The basic State Pension is currently a maximum of £115.95 per week if you are up to date with your National Insurance (NI) contributions. However, from April 2016 it will rise to £155 per week. So great news, right?

Not quite. Here’s the part that’s had much less fanfare. There are actually two State Pensions at the moment, the basic one and the Additional State Pension, which used to be known as Serps (State earnings-related pension scheme). This second pension is based on earnings, and can provide up to £166 more per week (though the average is more like an extra £30, due to the number of people whose NI payments aren’t up to date). But the upshot is that a great many pensioners are currently receiving more than the £155 promised by the new State Pension.

The new flat rate may be welcomed by some people, but it’s hard on those who’ve made NI contributions all their lives, only to find they will receive less in retirement. Current estimates are that about 20 million people will be worse off by an average £1,400 a year. It’s yet another reminder (as if we needed one) that relying on the State Pension is increasingly not an option. After all, it’s not just the newest round of changes we have to worry about – how many more changes might come into play between now and the date we retire?

The only sensible response to all this is to make your own arrangements. Think of your personal or workplace pension as the core of your retirement income, and get used to thinking of any State Pension you might receive as just a useful extra.

Tips for building up your pension

• Start as soon as you can
  Every year that you waste could amount to thousands of pounds of lost compound interest by the end of your saving (‘accumulation’) period. The sooner you start, the better value your pension will deliver.
• Increase your contributions
  Yes, it’s obvious – but still worth repeating ad nauseam. Nowhere will grow your money as efficiently as your pension, so be generous to your older self.
• Use salary sacrifice
  If you’re in a workplace pension or self-employed, using salary sacrifice to pay into your pension can make it even more tax efficient, by lowering your taxable salary.
• Be proactive
  Your pension will probably be invested in a default fund, which may not be best for your stage of life. If you have a long time to go until retirement, you should consider more high-risk, high growth funds. Talk to a financial adviser about this.
• Check your fund’s performance
  Many financial advisers on unbiased.co.uk offer a free pension check so you can see how well your fund is performing compared to others on the market. Is it worth switching? Find out sooner rather than later.
• Top up your State Pension
  If you’re at or near retirement, use the State Pension top-up to boost your State Pension. Note that this won’t be available after 5 April 2017.
• Seek financial advice again at least ten year before you retire
  Advice taken in the run-up to retirement can give your pension pot a significant additional boost, while also helping you understand your options under pension freedom.

Whether you’re just starting to save into a pension or are soon to retire, find a specialist adviser here.