As the saying goes, it’s never too early to start thinking about retirement planning. As part of that planning, you’re probably anticipating drawing an income from sources other than a salaried full-time job. This might include withdrawing money from an investment account, but it might also involve taking pension payments you receive at regular intervals. The pension system allows you to collect a monthly wage based on the employment you had throughout your working life — but during your retired years.
The total amount of monthly pension people get isn’t the same for everyone, which is just one of many reasons why it’s important to understand exactly how much you’ll earn each month. Knowing this amount makes it easier to plan your lifestyle in retirement — but how should you do that? A pension calculator can help. Here’s what you need to know about these effective planning tools.
How Are Pensions Calculated in the UK?
There are two types of state pension schemes in the UK based on age. Men born on or after April 6, 1951, and women born on or after April 6, 1953, fall under the older scheme called the Basic Pension. Most people in that age bracket are already receiving their pensions.
Anyone born after those dates receives the new State Pension. The current age to start claiming State Pension is 65 for all genders, but you can choose to continue working and retire later in life. Over time, the age will increase to 67 for both genders. The State Pension is a weekly payment of up to £181.15 per week in 2022, but it can exceed that maximum for certain retirees who started earning work credits before 2016.
If you’ve worked for 35 qualifying years and earned your work credits before April 2016, you get the full State Pension of £181.15 each week. If you have fewer than 35 qualifying years calculated before 2016, your weekly pension is an equivalent percentage of £181.15 based on how many years you worked. For example, someone who worked for 11 qualifying years worked 11/35 years, which rounds to 31%. So, that person receives a weekly pension of £56.15, which is roughly 31% of £181.15.
If you have a combination of qualifying work years before and after 2016, you have the highest number of qualifying years you would’ve received on either the old set of rules or the new ones. Then, the credits you earned working after 2016 are added to that amount. For example, suppose you would’ve had 20 qualifying years as of 2016 under the old pension scheme, but you would’ve had 25 qualifying years with the same work history under the new pension scheme. The 25 qualifying years would count for your work history prior to 2016, and all credits you earn after 2016 count based on the new regulations.
Why Use a Pension Calculator?
A UK pension calculator is a beneficial tool that gives you a clear idea of how much you’ll earn during retirement. You can use the calculator to determine whether you’ll make enough based on State Pension alone or whether you’ll need additional sources of income, such as investments or private pension schemes.
This can also help you decide whether you can retire early or whether you’ll need to defer your State Pension for a few years. If your projected earnings from State Pension are lower than expected, you can see how voluntary contributions can help you catch up on qualifying years.
GOV.UK maintains a State Pension Forecast that can give you the most accurate estimate of the pension you’ll receive. You’ll need to sign in to Government Gateway to use it, but the results you find are specific to your situation. Rather than estimating, you can accurately assess the number of work credits you have and see the remaining credits you’ll need to get the State Pension you desire.
There are other pension calculators that allow you to enter information and see results for different scenarios. You fill out variables such as your date of birth, gender, planned retirement age, current gross salary and planned annual income during retirement. The more sophisticated pension calculators also allow you to enter information about your work and private pensions outside of the State Pension. The results tell you your estimated annual income at different retirement ages.
What Are the Work Requirements for a Pension in the UK?
The work requirement for earning State Pension in the UK depends on when you started earning your work credits. If you started earning work credits before 2016, your minimum requirement is based on a combination of current standards and past standards under the basic State Pension. If all of your qualifying working years happened after 2016, you follow the rules of the new State Pension.
You must work a minimum of 10 qualifying years to receive State Pension. If you work fewer than 10 years, you don’t qualify to receive any State Pension. It takes 35 qualifying years to earn a full State Pension, but you can still earn a pension if you’ve worked for between 10 and 35 qualifying years. Your pension will simply be a percentage of the full State Pension.
A qualifying year is either one in which you pay into the national insurance system by deductions from your wages or you receive credit for doing so. As long as you meet a minimum earnings threshold each week from working, your employer automatically takes national insurance contributions from your paycheck. If you’re self-employed or not working, you can choose to make voluntary contributions to national insurance to have a certain year count as a qualifying year.
If you’re unable to work because you have a chronic illness or serve as a primary caregiver for someone who does, you can earn credit for a qualifying year without making contributions. In certain government benefit programs, everyone who receives the benefit also receives credit for a qualifying year as if they’d worked that year.
What Does Full State Pension Mean?
Full State Pension means you get the maximum pension of £181.15 per week, which is around £724.60 per month in 2022. If you’re in the early days of your working life now, your full pension may be higher than the current maximum because the full pension amount could increase over time.
Pension calculators give you solid facts to plan your life now so you can have the lifestyle you want during retirement. When you know your circumstances early, you have time to shape them through careful planning.