In the Jane Austen novel Emma, the main character, Emma Woodhouse wittily describes the difference between being rich and being poor in old age.
Emma was published in 1815, but in principle her comments still hold today. Those with enough money can find their later years some of the most fulfilling of their lives. Those who are short of money can find them difficult and depressing.
A Brief History of the State Pension
The original state pension was introduced in 1909. Unsurprisingly it has seen quite a few changes since then.
Starting in April 2016 the existing state pension will be changed to the new state pension. As the new state pension is a means-tested benefit the amount received, if any, depends on your National Insurance contributions. You are likely to need at least 10 years’ worth of payments to claim any state pension. You will need at least 35 years’ worth of payments to claim the maximum amount.
How Do I Calculate My Pension?
The easiest way to calculate your state pension is to get an estimate from the gov.uk website. You can also apply for a National Insurance statement, which will show if there are gaps in your payment record. These may have been for perfectly legitimate reasons and be completely legal, but they may still impact your future pension.
If this is the case, you may be able to undo, or at least limit the damage, by making additional NI contributions.
You can also have NI contributions credited to you if you are in receipt of certain benefits. This could be particularly useful to people taking time out of work to raise children or to care for elderly relatives. Again, you can check if you are eligible for NI credits on the gov.uk website.
Can I Rely on the State Pension?
There are two parts to this question.
The first part is how likely it is that there will continue to be a state pension.
The second part is whether or not it will be enough to live on.
There are no guaranteed answers to either part of the question. It should, however, be possible to make some reasonable guesses about the second part.
In short, you need to think seriously about the sort of lifestyle you want to have in retirement. Then you need to start costing out your plans. Of course, some aspects of your life may be substantially cheaper in retirement. For example you may have paid off your mortgage. You may also be able to stop buying a season ticket to travel to work or to give up your car.
You may, however, get a surprise at just how many expenses you will still have in retirement. For example, if you own your own home you will still need to maintain it. That’s even before you start thinking about actually having fun in your retirement.
Voluntary Pension Contributions Could Make All The Difference
Under the auto-enrolment scheme, all eligible workers are automatically enrolled into a workplace pension scheme.
As a part of this scheme, workers make pension contributions automatically out of their wages. These contributions benefit from tax relief.
Employers also make contributions. There are therefore obvious benefits to being a part of a workplace pension scheme.
There is, however, the obvious drawback that pensions contributions reduce the amount of money a person has available in the here and now. As the scheme is entirely voluntary, everyone needs to take their own decision based on their own personal circumstances.
It is, however, arguably impossible to overstate the importance of having adequate retirement savings in place. Does anyone really want to spend their later years in poverty?