The state pension age is currently 66 for both men and women in the UK. This will gradually increase to 67 between 2026 and 2027. You can easily check the government website for your own pension age. There are highly likely to be future increases, with an increase to 68 already being considered by 2039, and more on the cards. What are the implications for you if you discover you’ll get your pension later than you thought? Let’s take a closer look.
The simplistic answer
Say you were expecting to get your state pension at age 66. But after checking online you now find that it will be 67. Your first reaction may be that you’ll need to defer retirement by a year to compensate. If you were planning to retire on your 66th birthday, you may feel you need instead to continue working till your 67th birthday. But is that correct?
The answer is: only if your earnings exactly equalled the state pension you’d have been entitled to had you been able to retire at age 66. Your earnings would therefore have to be very low, around £10,600 per year based on the current pension. This is a special case. Earnings this low or lower would imply that you’re a part time worker.
Other than this special case, what are the implications?
Medium to high earners
As we just noted, annual earnings of around £10,600 are a special case. Above this, you’d be earning more than the state pension. This means that it would take less than a year to recoup the lost year’s pension.
Let’s look at an example. Suppose you’re earning £50,000 a year. We’re assuming that you’ve just found out that your state pension age has risen from 66 to 67. If you were to work a full extra year, you’d earn £50,000 before tax, which works out at around £38,000 after deducting income tax and national insurance. This more than covers the lost £10,600 (presumed untaxed). In fact by working the extra year you’d be £27,400 better off than you’d originally planned; this means you’d have over-compensated for the lost year.
How long would you need to work beyond age 66 to exactly compensate? Should you just divide £10,600 by £38,000 to give the required fraction of a year? No, because tax complicates the calculation. Depending on where in the tax year your birthday falls, the required time would be between 11 and 16 weeks. But in all cases you’d need to work much less than a year to compensate for the lost year’s state pension.
If you earn less than £10,600 a year the situation is reversed (assuming you’d be entitled to the full state pension once you start getting it). For our example, we’ll assume annual earnings of £5,000 (assumed free of both income tax and national insurance).
In this example you’d need to work an extra 2 years to compensate for the state pension lost for one year.
It’s fair to say that the impact of an increase in state pension age is greater the lower your earnings are. Perhaps this is not so surprising. What may be more surprising is that for anyone earning more than £10,600 a year, the lost state pension can often be made up by working much less than a full year.
By using our Intelligent Retirement Calculator, you can model different pension and retirement ages, and see the effect on your finances.