Retirement Income: Maximising Your Entitlement To State Pension

retirement income sign

How to maximise to your retirement income

For many, the state pension is the central part of their retirement funds. For those who retired last year, a third of their total retirement income was derived from the state pension according to research from Prudential. For just 15% of all retirees, the state pension is their sole retirement income.

This isn’t a significant amount. The maximum that a person can claim is currently set at £155.65 or just over £8,000 per year if you reach retirement age after 6 April 2016. If you had already reached retirement age by then, your entitlement is at a maximum of £119.30 a week (£6,200 per year). When you compare that to the average income of £27,000 a year, you could expect to see a significant drop in your income when you decide to retire.

And even then, you might not be entitled to the full state pension. Many circumstances can reduce your entitlement to state pension which will make it harder for you to enjoy your retirement.

So what can you do to maximise your entitlement to state pension and still save on tax contributions? Here is our advice:

Family Companies And Retirement Income

Unless a family member already has 35 qualifying years as an employee, (either in or outside the current family company), then it is usually best to pay family members a salary that is equal to the lower earnings limit of National Insurance. For the 2016/2017 tax year, this is £112 per week or £5,824 per year.

If the family company is already paying a salary that is between the lower earnings limit and the primary threshold (£155 per week or £8,050 per year), then it is possible to have zero contributions but still gain state pension qualifications.

The problem is that this will only support older family members or those who already have the 35 qualifying years. Instead, you need to look at other solutions to help you save on tax contributions while also maximising the state pension you’ll receive.

Self-Employed

If you are self-employed you will contribute to your state pension through Class 2 NI contributions. For the current tax year (2016/2017) this is set at £2.80 per week or (£145.60 per year) when profits exceed the small profits threshold (£5,960).

If your profits are below this threshold, you can voluntarily pay into your NI contributions through Class 2 contributions. This is usually a cheaper option than paying other forms of national insurance contributions. However, this option will cease to be available from 6 April 2018, although for the time being, it is advisable to take advantage of the tax savings.

Class 3 And Class 3A Contributions

If you’ve had any gaps in your employment history, then you are likely to have a shortfall in your NI contributions. These can be made up through Class 3 contributions. This is currently set at £14.10 per week. This is voluntary and the payback period can be as long as three years (just under £2,199.60).

However, if you reached state pension age before 6 April 2016 and are looking to increase your state pension, you can pay a voluntary Class 3A contribution. The amount of contribution required depends on your age and when the contribution is made.

However, there are limits to the Class 3A contributions. You can only pay 25 such contributions, and each one will increase your basic state pension by £1 per week. Therefore, the maximum amount you can increase your state pension by is £25 per week. Older retirees may find that the costs to do this aren’t justified as it would require an extensive period to recoup the costs of the contributions.

Reaching Retirement Age After 6 April 2016

If you are to reach retirement age after 6 April 2016, then you qualify for the new state pension scheme. The age at which people can claim pension is increasing, and it will be 68 within the next few years.

Those who qualify for the new Single Tier State Pension need to have had 35 qualifying years if they are to receive the full entitlement. This is a rise of five years. Ensuring that this is met is important as not doing so can significantly reduce your weekly payments. Though it should be noted, that if you’ve had a period when you were ill or looking after a child, you can get credit to contribute to those 35 qualifying years.

If you are unsure about what you’ll be entitled to when you retire from the state, you can apply for a State Pension statement by completing a form BR19. You can find this on the Government website.

Are you looking to maximise your retirement income? Then why not contact Ovenden Bookkeeping and Accounting Services Ltd for helpful advice and support?

Resources:

https://www.gov.uk/new-state-pension/overview

http://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2014-11-19

 

Posted in Sole Trader at 2016-06-30 by Alan Ovenden

Tags: pension planning, retirement income, retirement planning, state pensions