5 Common Myths About the UK State Pension – What You Need to Know
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For many people, the UK State Pension forms a crucial part of their retirement income. While personal and workplace pensions can supplement retirement savings, the State Pension currently provides a secure, inflation-linked income for life. However, despite its importance, there are many misconceptions about how it works, who qualifies, and how much is received
How Does the New State Pension Work?
The new State Pension applies to individuals who reached State Pension age on or after 6 April 2016. To qualify for the full amount, you need 35 years of National Insurance (NI) contributions or credits. A minimum of 10 years is required to receive any State Pension at all.
As of the 2024/25 tax year, the full new State Pension is £221.20 per week (£11,502.40 per year). However, not everyone will receive this amount, as entitlement depends on your NI record.
In our role as financial advisers, we frequently encounter misconceptions about the UK State Pension, which can lead to confusion when planning for retirement. Below, we address five of the most common myths.
1. “The State Pension Is Not Taxable” – False!
A common misunderstanding is that the State Pension is a tax-free benefit. In reality, the State Pension is treated as taxable income in the same way as employment earnings or private pension withdrawals.
How Does Tax on the State Pension Work?
No tax is deducted at source from your State Pension (unlike employment income, where PAYE is applied).
Instead, HMRC considers it as part of your total annual income. If your total taxable income exceeds the personal allowance (£12,570 in 2024/25), you will pay tax on the portion above this threshold.
If you have additional sources of income, your tax-free allowance may be allocated elsewhere, and tax is often deducted via your other pension payments.
Tip: If your total income exceeds your personal allowance and this is not being deducted at source for instance property rental income, ensure you are setting aside funds to cover any tax due.
2. “My National Insurance Contributions Are Held in My Name for My Retirement” – Incorrect!
Many people believe that the NI contributions they make throughout their working life are saved or invested on their behalf for their own State Pension. This is not the case.
Where Do NI Contributions Go?
The UK operates a “pay-as-you-go” system, meaning today’s working population funds the pensions of current retirees.
Your NI contributions do not accumulate in a personal account; instead, they contribute towards funding public services, including pensions, healthcare, and welfare.
Why Does This Matter?
This structure relies on a balance between the number of people working and the number of retirees. As life expectancy increases and birth rates decline, concerns about the sustainability of the State Pension system are growing. Future reforms may be required to ensure long-term viability.
Tip: It’s important to plan beyond the State Pension by building private retirement savings as for most individuals, it is unlikely to be sufficient to meet your desired standard of living in retirement.
3. “You Cannot Defer the State Pension” – Incorrect!
Some people believe that once they reach State Pension age, they must start claiming their pension immediately. However, you have the option to defer your payments, which could increase the amount you receive later.
How Does Deferring Work?
If you delay taking your State Pension, your payments will increase by 1% for every nine weeks deferred (equivalent to 5.8% per year).
For example, if you defer for one year, your weekly pension will increase from £221.20 to approximately £234.00.
When Might Deferring Be a Good Idea?
If you continue working beyond State Pension age and don’t need the income immediately.
If you expect to live a longer retirement and want a higher guaranteed income later on.
If taking the pension would push you into a higher tax bracket, delaying may help manage tax liabilities.
Tip: Deferring the State Pension can be beneficial, but it’s important to weigh up life expectancy, financial needs, and tax implications before making a decision.
4. “You Need to Have Worked for 35 Years to Get a Full State Pension” – Misleading!
While 35 years of NI contributions typically entitle you to the full new State Pension, you do not necessarily need to have worked for 35 years. Many people assume that if they have taken career breaks (e.g. for parenting, illness, or caring responsibilities), they won’t qualify for a full pension.
How Can You Get NI Credits Without Working?
Claiming Child Benefit (for children under 12).
Providing unpaid care for at least 20 hours per week.
Receiving certain benefits, such as Jobseeker’s Allowance or Employment and Support Allowance.
What If You Have Gaps in Your NI Record?
You may be able to buy voluntary Class 3 National Insurance contributions to fill missing years.
You can typically backdate voluntary NI payments by six years, though special extensions have allowed people to purchase missing years going back further to 2006/07 however this ends on 5th April 2025.
Tip: It’s worth checking your State Pension forecast on the government website to identify any gaps and consider whether making voluntary contributions is worthwhile.
6. “My Spouse or Partner Will Continue to Receive My State Pension When I Die” – Not Necessarily!
A widely held belief is that when someone dies, their State Pension will automatically transfer to their spouse or partner. However, under the new State Pension rules, this is not the case.
What Happens to the State Pension When Someone Dies?
If you receive the new State Pension, your spouse will not inherit your full pension upon your death.
If your spouse has a low or no State Pension entitlement, they may be able to inherit some additional pension or NI credits, depending on individual circumstances.
The old State Pension system (for those who reached State Pension age before 6 April 2016) had more generous survivor benefits, but these do not apply to the new system.
Tip: It’s essential to consider private pensions, life insurance, and savings to provide financial security for your partner in retirement.
Conclusion: The Importance of Understanding Your State Pension
The UK State Pension is a vital part of retirement income, but misconceptions can lead to incorrect assumptions about entitlement, taxation, and planning options. Given the complexities, seeking professional financial advice is crucial.
To understand how your State Pension entitlement fits into your wider retirement strategy, or to explore ways to maximise your retirement income, speaking to a financial adviser can provide personalised advice tailored to your circumstances.
Check your State Pension forecast today at: www.gov.uk/check-state-pension
If you have any questions about boosting your retirement savings, we’re here to help. Get in touch today!