Here’s what you need to do to get the full State Pension, and why it matters

If you’re worried about what you’re entitled to in retirement, here’s a guide to make sure you’re not left out of pocket.

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If you’re confused by the new State Pension, you’re not alone. Recent studies have shown that a large number of potential retirees are unsure as to what they’re entitled to when they leave the workforce. And the government’s constant tinkering with the system isn’t helping matters.

The latest change involves a tweak to the rules for couples where one partner is of working age, and the other is above State Pension age. They will no longer be able to claim for Pension Credit, which is a means-tested pension top-up.

How much are you entitled to? 

The actual pension amount you will be entitled to when you retire depends on several factors. In April 2016, the old two-tier State Pension system was replaced by a new ‘flat rate’ system. This is currently worth £164.35 a week, or £8,546.20 a year, and will rise to £168.60 in April (£8,767.20 a year).

You can only get the full State Pension if you have 35 qualifying years of National Insurance Contributions (NIC). However, you will still be entitled to a weekly payout if you have at least 10 qualifying years.

Every year of NICs over the 10-year minimum adds around £4.70 a week to your new State Pension.

Buying NICs

If you don’t have the full 35 years, the good news is you can buy extra NIC credits. As I’ve noted before, if you reach State Pension age after April 2016, you have until April 2023 to fill in any gaps between 2006 and 2016. To do this currently costs around £630 per year. In the new tax year, (April 5) the cost will hit £780, so it’s worth acting today to get the lower rate.

According to my figures, one extra year of NICs is worth £4,888 of State Pension in retirement (assuming a retirement age of 65 and life expectancy of 85). In my view, paying £630 for £4,888 worth of credit is worth the cost. I should note at this point that these numbers are only a rough guide and will vary from person to person.

Time to act 

I think it’s important to act today if you want to get the full State Pension because you could get a much bigger return on your money buying extra NICs than saving yourself. As my figures above show, buying additional NICs today is a worthwhile tradeoff. 

The more you buy, the better the return. Buying five years to fill in gaps on your record would cost £3,150, but would yield £24,440.

If you are planning on retiring in the next 10 years, my figures show this trade is almost certainly worth the money. To save £24,000 in the space of 10 years, you would need to put away around £150 a month, or £1,800 a year, assuming an interest rate of 5% per annum on your money. 

If you are planning on retiring in the next five years, it’s even harder to reach the £24,000 goal. My figures show a monthly deposit of £350, or £4,200 a year, is required at an interest rate of 5% to achieve this target within five years.

These figures explain why it’s important to act today to make sure you get the full State Pension.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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