How to maximise the state pension, and cut your first pension tax

by Doug Brodie

It’s important to get what you’ve already paid for throughout your life, and often we see that people who have had breaks from paying national insurance in the UK do not have full state pension benefits. Most commonly we see this with women who have taken career breaks to raise a family and/or run a household, and it also applies to folk who have worked abroad.

If you haven’t done so already, then you can follow the outline below from Ian, our project director, who has had spells working in both the US and Switzerland. Here’s his take on how to fix it:

From time to time we have used the Government web site to see what my wife’s and my state pension will be when we reach retirement age.  It is quite a good site and quite simple to use. Go to the well-named site and click on the Green Start Now link. https://www.gov.uk/check-state-pension.

I noticed that my Wife has not made a contribution in the full number of years. We lived abroad for a few years and she retired at 60, so some years were missing. The site explains that she can call and see what additional contribution to make to add the missing years and get the full amount.

After sitting in a queue for a good part of an hour the answer was clear.  In her case pay £2,420.60 to take the years to the maximum.  I did the sums, and she has to claim a pension for a little over 3 years to be in profit.  After that and for all of her, hopefully, long life it is all upside.

She was given details of how to make the payment and a very long payment number to enter.  Simple enough. We made the payment and when we checked back a few months later the funds have been allocated, the years contributed has been uplifted and her pension payment will now be the maximum.

If you have the cash available to take up this option, it is a first-class investment. It is certainly worth the small hassle.

This is your homework

This is the research behind how we invest client money to generate income, and why we do it.

All the figures, charts and tables have been updated to the end of 2022 so it calculates precisely what happened to the four main alternative ways of investing your pension and ISAs:

1) A low cost, passive index, FTSE100 tracker

2) A low cost, passive index, MSCI World tracker

3) A traditional 60/40 portfolio (60% equity, 40% bonds)

4) Natural dividend income.

Alongside the strategies we then overlay four different methods of drawing income:

a) 4% of the fund value each year

b) 4% of the starting value, then increasing that sum by RPI each year

c) £4,000 fixed per year

d) The natural income from trusts, however much that is.

Bill Bengen in the US calculated ‘The 4% Rule’, known as the SafeMax using b) above. A big issue with anyone using that is that Bill calculated the rule using US data, and that is not the same as the UK – for example, our inflation rates are completely different, and the S&P500 returns used by Bill are not the same as FTSE100 returns. Not same, same!

We have just commissioned our own calculation in-house, the UK version of the safe amount to draw, it will be published as soon as it’s ready.

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