The Ultimate Guide to Pension Retirement Options: Introduction

Introduction

When you get to the point of retirement, there are a bewildering array of options available to you, particularly regarding pensions. Pensions are both simple in essence and yet complex in implementation.

I remember back in 2006 the government introduced something laughably called pensions simplification. It was lauded as a big thing at the time, and I suppose it was, but I’m not convinced its headline would have passed trading standards, because things are still pretty complicated, especially for those who don’t do this stuff every day.

It’s alright for me – I spend my life talking to people about their pensions options. But if you’re approaching retirement and this is the first time for you, and you don’t live in this world, there’s a lot to think about. 

How the State Pension Works

The bedrock of our retirement income for most of us will be the State Pension. It comes in for a lot of flak, often among FIRE followers, but I really don’t think it’s going anywhere. It might change form, and the date at which you can get it is being pushed back, but I think it’ll be there for a while.

Sure, you can plan for retirement without it, so that essentially it become ‘gravy’ on top of whatever provision you make for yourself, but I always factor it in for my clients, no matter their age. You get a State pension in return for years of National Insurance contributions made.

There is a threshold as of 6^th April 2016 when the new State Pension became a thing. If you had some NI contributions prior to that, and you’d have been worse off under the old plan than the new, then you’ll get the new basis.

The full state pension, as it stood when I recorded the podcast this blog is based on in early 2021, is £175.20 per week or £9,110 per year. While you wouldn’t want to be entirely dependent on that, it’s not half bad, in my view. You get the full state pension in return for 35 years of complete NI contributions. You can check the state of your NI record and get a State Pension forecast on the gov.uk website.

Now it might be that when you check your state pension forecast, there’s a reduction because you were so-called ‘contracted out’ at some point in the past. This was a mechanism whereby some of your NI contributions were redirected into a workplace pension scheme or something called an appropriate personal pension plan, the thinking being that this money would do better there than in the government scheme.

It’s no longer possible to contract out since 2016 as the new State Pension is quite a bit more generous and simpler than the old one. I find the State Pension forecast page pretty clear, actually, but if you have any questions, you can always send me an email or better still ask in the MeaningfulMoney Facebook group (meaningfulmoney.tv/community) for more immediate help!

It might be that you don’t have enough working years left between now and your state pension age to make up any shortfall in your record. If that’s the case, usually the site will let you know what you can do to make up some lost years, but you are limited to how far back you can go to make up the record. Generally speaking though, if you can pay in to increase your record, it’s a very good investment, as you’re very likely to live long enough to get value from it.

With the State Pension – and with all pensions really – you need to know what you’re going to get and when. So check it with the gov.uk website and write it down somewhere. Note that you can defer your state pension when you get to state pension age. If you do, you get an uplift of 1% for every nine weeks you defer. That works out at just under 5.8% for every year you defer.