State Pension – what you need to know for 2023 & beyond
The pension scene is continuously changing and the State pension is no different. This makes it increasingly challenging to stay up to date on an already complicated area. Here we set out the important State Pension changes expected in 2023;
Change to state pension top-ups comes into force from April 2023
You need at least 10 qualifying years of contributions (NICs) in your National Insurance record to receive any state pension, and 35 years to get the full amount. The full rate of state pension is now worth £185.15 for most people so can form a useful base for retirement income. However, many people do not get the full state pension when they reach retirement as they are not aware that they have gap in their NICs. In 2020, only about 45.6 per cent of people were getting the maximum new state pension.
Topping up your NICs can result in an enhanced state pension. Filling a whole year of NICs costs approximately £824 resulting in an additional pension of £275 per annum, which will rise with inflation. Paying £8,240 to fix a ten-year gap could boost your pension by £2,750 per annum, worth an extra £55,000 extra over a 20-year retirement, without taking into consideration inflation proofing.
If you're a man born after 5 April 1951 or a woman born after 5 April 1953, it is possible to fill in historical gaps going back as far as 2006-07. This means you can make up for 16 years of missed years. However, after 5 April 2023, the opportunity to fill these gaps will be limited to six years only for everyone so it’s a good idea to act now to see whether you can benefit.
The Government recommends contacting www.gov.uk/Future-Pension-Centre first to find out if you’ll be better off.
The Triple lock...are you now a tax payer/higher rate tax payer?
The ‘triple lock’ refers to the way in which the state pension is set up to rise in line with the highest of these three measures every year:
A flat 2.5% rise
Average earnings growth • Inflation
As a silver lining from rising inflation, the State Pension will rise in line with September 2022’s inflation rate of 10.1% in the 2023-24 tax year. This is the biggest ever increase to the State Pension with those eligible for the full amount to be in receipt of as much as £10,600 a year for the first time.
While this is positive, it might be worth keeping in mind whether you will now a now a tax payer when you haven’t been previously, or if this increase has pushed you into a higher tax bracket. The personal allowance (the amount you can earn tax free) income tax and higher rate tax thresholds have been frozen until 2028. This means that many will now be earning more and therefore paying more tax.
If you have other taxable income and this brings you over the personal allowance of £12,570, you’ll pay basic rate tax on anything above this amount. If you are a basic rate tax payer and this increase in the State Pension brings your total annual earnings to over £50,270, you will pay higher rate tax on any income above this.
The state pension is not subject to tax at source, which means that you will receive the total amount gross/without any tax deductions. If the increase will now take you above these thresholds, you will need to complete a self-assessment and submit it to HMRC to determine your tax liability. We, therefore, recommend you keep a record of your state pension income, as you won’t receive a P60 from the government.
Increasing state pension age
The Government is also expected to make a decision soon on when to raise the state pension
age to 68. The current state pension age is 66 and is due to increase to 67 in 2028 and 68 by 2039, however, there are plans to bring this forward even sooner. This is something to bear in mind as a faster rise would put millions of people approaching the state pension age at risk if they are heavily reliant on the state pension as a means to funding future income. With the state pension amount not even covering the essentials for most, it is so important to make an alternative provision for your retirement.
Without a doubt, planning for retirement is more essential than ever. Your retirement should be an enjoyable prospect - not a daunting one and here at BFP we are passionate about planning for peace of mind. With the right guidance and financial planning, you’ll be able to put in place a long-term retirement plan that can help put you on track for the later life you want.