personal finance

That's why we need the state pension! Here's what you'd pay if you had to buy it yourself

While the new state pension only pays a maximum of £11,502 a year – and many on the basic state pension get much less – it would be hard to replicate this income from your own resources.

A pensioner who use their combined pension pots to buy an annuity at retirement would need a staggering £223,434 in savings to generate the same level of income, according to new research from fund manager Fidelity.

In fact, they would need even more than that, because people typically buy an annuity with the money that remains after taking their 25 percent tax-free cash.

Someone who took their tax-free cash first would need pension of £287,560 to replace a £11,502 state pension.

Yet the average pension saver aged between 55 and 64 has only £107,300, according to the Office for National Statistics, leaving them way short.

Given its importance, it is hardly surprising that the state pension was an early battleground in the general election, with both Conservatives and Labour pledging to maintain the triple lock guarantee if they win, said Ed Monk, associate director at Fidelity International.

“Whichever party wins, the state pension is due to rise by the triple lock over the life of the next Parliament. That will only add to its importance to the finances of retired people – and it is already very important,” Monk said.

The triple lock lifts the state pension each year by inflation, earnings or 2.5 percent, whichever is highest.

It gave 12.5 million state pension as a bumper increase of 10.1 percent in April 2023, based on inflation, and another 8.3 percent this year, based on earnings, a huge help in the cost-of-living crisis.

Now PM Rishi Sunak has gone a step further by pledging to increase the personal allowance for pensioners using the same mechanism.

Currently, the personal allowance has been frozen at £12,570 until 2028. This is only £1,068 higher than today’s maximum new state pension.

The state pension only needs to increase by five percent a year in 2025 and 2026 to exceed the personal allowance and instantly become taxable.

This would see the Department of Work and Pensions paying state pension and HMRC immediately taking a chunk of it back, wasting time and money.

As yet, we do not know what the Labour Party would do if the state pension exceeds the personal allowance.

What we do know is that life without the state pension would be unthinkable for millions.

Monk said the reason the state pension would cost so much to replace from your own pocket is that it is both guaranteed and protected against inflation. “These two things are precious and difficult to replicate any other way.”

Annuity payments are guaranteed to last for life, like state pension, and today’s rates are much more generous than just a few years ago. Pensioners can also buy an “escalating” annuity where the income rises each year, but these are pricier than those paying a level income.

Given how valuable the state pension is, it’s vital make sure you are qualify for the maximum amount, Monk said.

To get the full new state pension you need to have made 35 complete years of national insurance (NI) contributions. “Company employees are likely to have NI taken automatically from their pay, while self-employed people with earnings above a certain level will pay their contributions via self-assessment.”

You can check your NI record online at

If you have gaps, you may be able to fill them with NI credits. “Otherwise, you could pay voluntary NI contributions to fill them,” Monk added.

Even if you do qualify for the maximum state pension, it still isn’t enough to live comfortably. So it’s vital to build retirement savings in your own name, too. Lots of them, judging by Fidelity’s figures.


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