UK state pension: A complete guide

Approaching retirement and starting to look into options for accessing your pension?

If you’re eligible for the UK state pension, this guide is for you - whether you’re looking forward to retirement in the UK or overseas.

We’ve put together everything you need to know about the state pension here in the UK. This includes how the system works, eligibility, how to claim your UK state pension in other countries and alternatives such as personal pensions. So, put the kettle on and settle in to learn all about how the state pension could affect you.

We’ll even throw in a useful money-saving tip for managing retirement income from overseas. Open a Wise multi-currency account and you can receive your UK state pension in another country, or payments to the UK from an overseas pension scheme - all for low fees and the real, mid-market exchange rate. It could make your retirement savings go much further.

Learn more

But more on this later. First, let’s cover the basic facts you need to know about the UK state pension.

The UK state pension - a quick overview

People who work in the UK and make regular National Insurance (NI) contributions are eligible to receive a pension from the Government when they reach retirement age.

Alongside the state pension, workers can choose to supplement their retirement income with a workplace pension (employees now typically join these schemes through automatic enrolment) and/or a choice of private pensions.

The UK’s state pension system scores highly in comparison to many other countries. In fact, the most recent Melbourne Mercer Global Pension Index (2019) ranked the UK’s pension system as the 15th best in the world¹.

Other key facts to know about the UK state pension system:

• A new state pension system was introduced on 6th April 2016, which is calculated based on National Insurance records only.
• Anyone born after 6th April 1951 (for men) or 1953 (for women) will receive the new state pension.
• The maximum value of the new state pension for the tax year 2021-22 is £179.60 per week², but you could receive less than this depending on your circumstances.
• The average pension under the old system was £153.36 per week, the average for the new state pension is £164.10 per week³.

What is the UK state pension age?

There is no default or forced retirement age in the UK, but you’ll need to reach a certain age before you can claim your state pension. This is currently 66, but the state pension age is scheduled to increase to 68 years old between 2037 and 2039⁴.

However, your actual state pension age depends on when you were born. You can find out yours using this calculator.

You don’t have to retire when you reach state pension age. If you like, you can carry on working while claiming your state pension at the same time.

Is early retirement possible in the UK?

You may be able to access personal or workplace pensions early, but unfortunately this isn’t the case with the UK state pension.

If you wish to take early retirement, you’ll still need to wait until you reach state pension age to access this pension⁵.

UK state pension eligibility - who can claim it?

To be eligible for any kind of UK state pension, you’ll need to have worked in the UK and paid National Insurance contributions for at least 10 years².

But to get the full state pension, you’ll need a record of National Insurance contributions going back a total of 35 years².

If you reached state pension age before 6th April 2016, the rules of the new state pension system won’t affect you. If you have at least 30 years of NI contributions, you’ll be eligible for the basic state pension of £137.60 a week². Plus, if you’re married, your spouse can claim a basic state pension based on your NI contributions record alone.

But if you reach state pension age on or after this date, the new rules will come into play. This means you’ll be eligible for the new state pension of £179.60 a week², plus anything extra you’ve built up with additional NI contributions under the old system.

It can be quite complicated to work out, which is why the Government’s pension calculator is a good place to start.

Not eligible? Alternatives to the state pension in the UK

If you haven’t got enough years of National Insurance contributions under your belt to qualify for the state pension, don’t worry. There are other options available to help you save for retirement if you aren’t eligible for the UK state pension.

Let’s take a look at each in more detail here:

Workplace pensions

The first option to consider is a workplace pension, formerly known as an occupational pension. If you earn over a certain amount a year and meet other conditions, your UK employer should automatically enrol you on a workplace pension scheme.

In a workplace pension, both you and your employer pay regular contributions into your pension pot, which grows over time. You may also get tax relief on your contributions.

There’s also the National Employment Savings Trust (NEST), a workplace pension scheme set up by the UK Government for automatic enrolment. But it can also be used by self-employed workers who meet certain criteria. This can help freelancers and sole business directors to save for retirement when they don’t have access to an ordinary workplace pension scheme.

Personal pensions

The second option is a personal pension, available from a wide range of different banks, financial institutions and other providers. These are pensions you arrange yourself and make regular contributions to, but you won’t get any help from an employer to grow your pension pot. However, you can benefit from tax relief with a personal pension, which could make it well worth starting one.

There are a few different types of personal pensions to choose from. These include:

• Ordinary personal pensions - available from many different providers, these are defined contribution schemes you make regular contributions to.
• Stakeholder pensions - these are pension schemes which must meet specific government rules, such as a cap on charges.
• Self-invested personal pensions (SIPPS) - these personal pensions offer greater flexibility and choice when it comes to where your savings are invested, but they also come with higher fees. A SIPP is best suited to those with larger pension pots and at least some previous experience in investing.

The UK state pension for expats

So, we’ve looked at how the UK state pension system works for citizens and permanent residents, but what about expats from other countries?

The good news is that foreign nationals can claim the UK state pension if they meet the eligibility requirements. This means that if you’re a citizen of another country but you’ve been living and working in the UK, and paying National Insurance contributions for at least 10 years, you should be eligible for at least the basic state pension⁶.

If you’re thinking of moving to the UK and want to make sure you’ll be eligible for a pension, you’ll first need to apply for a National Insurance number.

Then, if you earn enough, NI contributions will be automatically taken out of your pay when you start working. But for those earning less than this threshold, you may need to make voluntary contributions to ensure you qualify for the state pension.

Moving from the UK? Transfer your UK pension abroad

If you’re dreaming of retiring somewhere a little sunnier than the UK, you can take your pension with you.

For personal pensions, you can transfer your UK-based savings to a qualified recognised overseas pension scheme (QROPS). This is an HMRC-approved pension scheme in your new country of residence, which permits transfers in from a UK pension scheme. Provided you choose the right scheme and complete all the paperwork, it should be quite straightforward to transfer your UK pension overseas.

This can make it easier to consolidate and manage all your different pension pots in one place, in the country you retire to. But there are tax implications to consider too, so it’s a good idea to get independent pensions advice before arranging a transfer.

How to claim your UK state pension abroad

You can’t transfer a UK state pension overseas, like you can with personal pensions. But what you can do is have your state pension paid to you in a foreign country.

Here’s how to claim your UK state pension once you retire to another country:⁷

1. Contact the International Pension Centre within 4 months of your state pension age
2. Complete an international claim form
3. Choose which country you’d like to have your pension paid to and how frequent you’d like the payments to be (every 4 or 13 weeks)

You can have your UK state pension paid to a bank account in your new country of residence, or to your UK bank account. Either option is likely to involve currency conversion fees charged by banks, plus a potentially expensive mark-up on the exchange rate which could cost you money. Luckily, there is a way around this, which we’ll look at next.

Wise - an easy, low-cost way to manage your pension benefits abroad

If your pension payments need to cross borders, you could save a small fortune on bank fees and exchange rate mark-ups by using Wise.

If you have your UK state pension paid into a bank account in Spain, for example, the money will be sent in GBP. This makes it likely that your bank will charge fees to convert it to EUR, probably using an unfavourable exchange rate as well. All of this eats into your retirement savings, so you receive less than you should each time.

But open a Wise multi-currency account and you regain full control of the transfer. You can use UK account details made available by Wise (without needing an actual UK bank account) to receive the money in GBP. So, no currency conversion is needed - which means no fees or terrible exchange rates.

You can then use the real, mid-market exchange rate offered by Wise to convert your pension to EUR, or whatever your new local currency is. There’s only a tiny fee to convert the currency, making it much cheaper overall. Or you can spend like a local using your Wise debit card, which automatically converts currency at the real exchange rate whenever you spend.

The very same process can be used when receiving international pension benefits from abroad, if you now live in the UK.

Wise is strictly regulated and uses sophisticated security measures to keep you and your retirement savings safe.

Join Wise and start saving today

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After reading this guide, you should have a decent idea of how the UK state pension system works - including whether or not you’re eligible to claim it.

We’ve covered all the essentials, from the state pension age through to claiming your UK pension if you move overseas. And of course, the best way to save money whenever your pension payments have to cross borders, using the handy Wise account.

It’s important to take the time to understand your pension options carefully, especially when it comes to things like tax implications. If unsure or you need more information, it’s a good idea to speak to a specialist pension adviser to figure out the best approach to manage your retirement savings.

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Sources used for this article:

1. Investopedia - top pension systems in the world
2. Money Advice Service - the state pension rules and changes UK
3. Which.co.uk - how much state pension will I get
4. Which.co.uk - state pension age calculator
5. Gov.uk - early retirement pension UK
6. Expatica - UK pension system
7. Gov.uk - UK state pension if you retire abroad

Sources checked on 27th April 2021