The State Pension: all your questions answered here

Roland Head answers your State Pension questions and explains how you may be able to generate extra retirement income.

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We’ve all heard of the State Pension. Most of us expect to receive it, when we reach retirement age.

But here at the Fool, we also get a lot of questions about the State Pension, suggesting many people are unsure of exactly how it works.

In this article, I’m going to answer all the most common questions about the State Pension and suggest two ways you may be able to generate extra retirement income.

My answers will all relate to the new State Pension, which is for men born after 6 April 1951 and women born after 6 April 1953. If you were born before those dates, you’ve already reached retirement age and should be receiving the ‘old’ State Pension.

When will I get the State Pension?

At the end of 2018, the State Pension age was 65 for both men and women. The government is now in the process of increasing this age to 66. This will affect men and women born between 6 December 1953 and 5 April 1960.

For people born between 6 April 1960 and 6 March 1961, the pension age will gradually increase to 67. Current proposals suggest that for people born after 6 April 1970, the pension age will gradually be increased from 67 to 68.

How much is the State Pension?

The current full State Pension is £168.60 per week, or £8,767 per year. To receive this amount, you currently need 35 qualifying years of National Insurance contributions.

The gov.uk website provides a handy State Pension forecast tool you can use to calculate your current entitlement.

Under current government policy, the pension increases each year by the highest of:

  • Average percentage wage growth in Great Britain
  • UK Consumer Price Index (CPI) inflation
  • 2.5%

For example, someone due to retire in 25 years could expect a payment of £312.58 per week, assuming an increase of 2.5% every year.

Is it paid automatically when I reach retirement age?

The State Pension isn’t paid automatically. Although everyone is entitled to it, regardless of wealth, you do have to claim.

You should receive an invitation letter two months before you reach State Pension age. This will explain how you can claim your pension. If you don’t receive this, there are various other ways to claim, including phone, online and by post. Check the gov.uk website for more information.

Can I increase the State Pension?

Depending on your circumstances, you may be entitled to additional benefits when you retire. But the State Pension itself is fixed and cannot be increased.

If you feel that you’ll need more to live on than £8,767 per year when you retire, then the first step I’d take would be to check your entitlement to company pensions, including all of your previous employers.

If you still have at least 10 years left until you retire, then the next thing I’d do would be to open a Stocks and Shares ISA. I’d set up an automatic monthly payment into the account and put the cash into a cheap FTSE 100 index tracker fund.

The dividend yield on the FTSE 100 is about 4.6% at the moment, so you should immediately start earning an attractive annual return. Over the long term, I’d hope to see some capital gains as well.

When you retire, this fund could be used to supplement your income or provide a lump sum.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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