May’s milestone … was requesting a state pension statement!

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Confessions up front…. May has not been such a good month!

My goals for the month were:

  1. Trial an additional account on my Spending Tracker to see if this helps me budget for irregular expenses.
  2. Choose which funds to use in my stocks and shares ISA.
  3. Request a state pension statement.
  4. Find a good savings account for new monthly savings.

Let’s get the bad news out of the way first!

  1. Not done! Admittedly, I didn’t have many one-off expenses in May, but there were a couple. I’ve thought about putting them into a separate tracker…but haven’t actually done it yet.
  2. Not done! I’ve written about my investment indecision, and am postponing my decision until after the referendum. I read an article this week saying Brexit could cause the FTSE 100 to fall 10%. Possibly I should be investing less in equities, more in bonds, but I don’t feel ready to make the decision so my initial investment is still in cash.
  3. Hooray, done! Read more below…
  4. Not done! I just didn’t get round to it…

So moving swiftly onto the good news…

  • £124.03 saved so far in the penny-a-day challenge (or, as last month, the bung-the-lot-in-in-one-go challenge). It’s good to have a target that doesn’t actually require much effort!
  • Requested a state pension statement.

Yes, I ticked off number 3! I’ll ignore the fact that it only took 5 minutes of my time, as all I had to do was ring the Future Pension Centre on 0345 3000 168 / 0191 218 3600. I gave them a few basic details – NI number, date of birth – and sat back to wait for the statement to arrive, which it did within a week or so.

State pension statement

So what did my state pension statement show me? Well, firstly it’s lower than I expected. I’m not sure why this shocked me, as I’m only in my forties and only have 21 qualifying years so far on my NI record. The estimate of what my state pension will be is based only on what I’ve paid in NI contributions so far, so of course it will be lower than the full amount. I have time to build up the extra qualifying years needed to give me the full amount.

My next reaction was a gloomy realisation that you have to work a lot of years to get the full state pension! Again, this is nothing I didn’t already know, but somehow seeing it in black and white on my own statement brought it home to me. The full basic state pension under the old system was accrued after 30 qualifying years, the full new flat-rate state pension after 35 qualifying years. That’s a lot of years!

When you think the latest life expectancy at birth is 79 for men, and 83 for women, it’s not unreasonable to expect a working life to be 35 years. Maybe I’m just tired, but having only 21 years already under my belt, there seems a lot of extra work stretching out ahead of me in order to earn entitlement to what amounts to quite a small sum at the end of day.

Knowing how many years of work are left until you’ve earned your state pension

The new state pension is accrued at a rate of 1/35th for every qualifying year, which means for every year you work from now on, you earn about £4.45 in pension. Importantly, once you’ve reached £155.65 per week, any additional NI contributions you pay will not earn you more pension.

Once I got out my calculator, it was easy to work out how many years of work are needed before I’ll be entitled to the full state pension. I subtracted the estimated starting amount of pension from my statement, which is based on my NI record to date, from the maximum new pension amount of £155.65 per week, and divided the shortfall by £4.45 which is what I’ll earn in pension for every new qualifying year I work from now on. This shows I’ve about another 10 years to go – which I think is a useful thing to know!

In my case, it amounts to working a total of 30 years not 35, which is probably because all of my NI contributions were based under the previous state basic pension, and the government ensures that you’re not worse off under the new system.

What else do you get from NI contributions?

If I continue to work, it won’t entitle me to any extra state pension benefit. It got me checking what else my NI contributions entitle me to, and it’s the following benefits: contribution-based Job Seeker’s Allowance, contribution-based Employment & Support Allowance, Maternity Allowance and bereavement benefits. I’m happy to pay into our welfare state, but it’s interesting to note where that chunk of money that disappears from our pay each month actually goes once we’ve reached our maximum state pension benefit.

Contracted out pension equivalent

The other element the state pension statement shows is the ‘contracted out pension equivalent’ or COPE. As I explained in my post in February, the old pension system was made up of two parts, a basic state pension and an additional pension. Many people, myself included, contracted out of the additional pension. This means either that we paid reduced NI contributions, paying into an employer pension offering an equivalent benefit instead, or that we paid the same level of NI contributions into a private pension. The government says it cannot estimate accurately this element of our pension as it will depend on the rules of the alternative pension you used, though it says the total amount of benefit, adding together both the COPE and state pension, shouldn’t be less than if you had remained in the state additional pension.

In summary, I’ve found requesting a state pension statement to be a very useful exercise, involving very little work on my part. There’s ambiguity around how much I’ll receive from the contracted out part of my pension, but it seems clear that I should be entitled to the full state pension after 10 more years of work. Unlike the uncertainties with my private pension which depend on how much extra I can save and what returns I’ll get, the state pension is refreshingly simple – if I work the extra years, I’ll get the full amount. Knowing this is a helpful tool in planning for retirement, and I’d recommend it to anyone who hasn’t already done so.

June’s goals

So what am I going to focus on in June? Well, seeing as 3 out of 4 of my May targets are still to be met, it seems logical to shift them here!

  1. Trial an additional account on my Spending Tracker to see if this helps me budget for irregular expenses. Budgeting is still the key element that is not quite working out for me at present, so if I can sort this I think it will make a big difference.
  2. Find a good savings account for new monthly savings. I’ve yet to do this, and with my reluctance at present to commit to an investment strategy, I think it’s more important to find somewhere to move money to each month so it’s not in my current account asking to be spent!
  3. Choose which funds to use in my stocks and shares ISA. Possibly one for the end of the month once we know what happens in the referendum.

Image: Pixabay: Emmie_Norfolk

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