What your state pension forecast really means

It is possible to boost your income by filling in gaps in contributions – but don’t wait until you are near retirement age, warns Sir Steve Webb

We are regularly encouraged to get a state pension forecast – but how exactly do you go about getting a forecast, and what information can you expect to see?

For most people, the best place to go is the gov.uk website where you can find a “check state pension” page. Once you have battled through the ID verification process you should be through to a page which provides a wealth of information about your state pension prospects.

It also includes a year- by- year record of your National Insurance (NI) contributions. It is worth checking your history now rather than when you retire, as it can be much harder to fix problems decades after the event.

However, because the information given depends on your individual circumstances, the type of state pension forecast figures you will be shown can vary. So let’s run through the various possibilities:

“I CAN ONLY SEE ONE NUMBER FOR MY STATE PENSION FORECAST”

For some people, the information they see when they log on to this site will be relatively straightforward. There will be one number (often in large print at the top of the page) which tells them how much pension they can expect to get. Often this will be precisely the standard flat rate figure (£ 203.85 a week or £10,636.60 a year).

But it could be a higher figure (where people had already built up a big state pension before the rules changed in 2016, and where this extra amount is now “protected”) or it could be lower (where someone has run out of years in which to build up a bigger pension). Either way, the key point is this figure is now fixed (ignoring future annual inflation increases in the state pension) and there is nothing you can do to change it.

It is important to say that just because you have maxed out on your state pension, this doesn’t mean you can stop paying NI contributions. If you are in employment or self- employment and earn enough to be liable to pay NI, you must go on contributing even though this will not boost your state pension. But there is no point paying voluntary contributions if you can no longer increase your pension.

“I CAN SEE TWO DIFFERENT FIGURES”

A more common scenario will be where people are – slightly confusingly – shown two different figures for their future state pension. In this case, there will be a big figure at the top and a lower figure in the smaller print. ( See the example above far right.)

The larger figure is the state pension you could get if you were to work (or pay voluntary contributions) for each year from now until you reach state pension age. The lower figure is the state pension you have built up to date (usually based on your NI record up to April 2023). You could regard this as the amount you have in the bank when it comes to your state pension. In the example above this is £96.04.

The web page does not tell you how many extra years you will have to pay before you have reached the maximum figure shown at the top, but this is relatively easy to work out.

For each qualifying year between now and your retirement, you add 1/35 of the full state pension rate to your entitlement. Based on a state pension this year of £ 203.85, this means that each additional year adds around £5.82 per week to your pension. This carries on until you hit the flat rate, which is the maximum you can be paid.

“I CAN SEE THREE DIFFERENT FIGURES”

In case that was not complicated enough, some people will be shown three different state pension figures.

The first two figures are as described in the previous section – a big figure for their potential pension if they keep working until retirement, and a lower figure for their pension “in the bank”, based on their contributions to date. However, some people can do better than the big figure at the top. This is where they have gaps in their past record of NI contributions which can still be filled.

The third figure shows them how far they could build their state pension both by working (or contributing) right up to retirement and filling available gaps. Relevant gaps would be those from 2006- 2007 onwards, as people have until April 2025 to fill such gaps.

Broadly speaking, filling gaps in your NI record which boost your state pension can be very attractive, as the cost of doing so is subsidised by the Government. In many cases, anyone who fills a gap and boosts their pension will have made a profit within about four years of retirement and can be hundreds of pounds to the good if they draw their enhanced pension for many years.

However, there are some important caveats when it comes to topping up your state pension.

Because of complexities in the way the new state pension is calculated, not every year will boost your state pension. This primarily relates to years before the 2016 rule change, and especially affects those who may have been a member of a “contracted out” workplace pension scheme; it is therefore vital to check first before handing over any money.

Paying voluntary “Class 3” NI contributions can be a very good deal. But if you were self- employed and can pay voluntary “Class 2” contributions for a past year, this is even cheaper.

If your state pension is going to be your only or main income in retirement then you may be entitled to top-up benefits such as pension credit or housing benefit. In this situation think carefully about spending now to boost your pension, as some or all of the boost may simply be clawed back through reduced benefit.

There is also no point paying to top up a year for which you could get a NI “credit” in any case, for example for years as a family carer.

Another thing that often confuses people on printed state pension statements is the Cope, or the Contracted Out Pension Equivalent. This figure is intended to explain why, as part of your pension calculation, an amount has been knocked off to take account of years when you paid in at a lower ( contracted out) rate because you were a member of a company pension scheme or similar.

The key thing about the Cope is that you can ignore it. People sometimes think they have to deduct the Cope figure from their pension forecast but this is not the case. The adjustment has already been done – this figure is purely for your information.

There is no doubt that it takes a bit of effort to check your state pension, but it is time well spent.

One final caveat is that the information above applies to those who live and work in the UK and are currently active in the National Insurance system in one way or another.