UK State Pension – should you include it in your net worth or not?

Following on from a thought-provoking post by Weenie over at Quietly Saving I thought that I would try to write a bit about my feelings towards the UK State Pension.

The main question: Should you include the UK State Pension in your Net Worth?

Thinking about it another way you could ask: Should you rely on the state for your own retirement plans?

It’s quite a question because the potential value of UK state pension is £168.60 per week or £8,767.20 per year. For a pensioner couple that’s about £17,500 per year paid to you just for being alive! It’s a sizable amount and to buy that level of annuity would maybe cost you £350,000. What’s more, the amount that you get should increase each year – and woe betide any government that doesn’t give pensioners an easy ride because old grey hairs vote!

Why would you not count that as part of your net worth?

In short, I believe in self-reliance. I long long ago read that due to demographic and economic changes, retiring in a conventional sense in the UK would not be possible for the majority of people. And we have seen some of this come to pass where pensioners are finding out that their DC pensions are not worth as much as hoped. Stagnation in wages and no end of spending opportunities has led to people coming to retirement age with huge debts with no way to pay them off. Rampant house price inflation has been a misery for my generation and the ease of credit has enabled many to live beyond their means.

I’m maybe banging the same old drum but it made me think that since the number of pensioners is increasing and the tax base is shrinking – that potentially the UK state pension may not be 100% reliable.

What could happen to the UK state pension?

1. The UK government may decide that only UK residents are paid the state pension
2. The pension is means-tested
3. Benefits are reduced/scaled back
4. Pension age moves upwards

Of these 1, 2, 3 and 4 have all happened to some extent.

1. Pensioners retiring in some countries have a frozen state pensions (like USA, Oz/Nz, Canada, ZA)
2. Pensions are taxed and taxes can rise or NI+Income tax are combined but it could be means tested like pension credit
3. The triple-lock was introduced and then removed – 30 years of inflation can do a lot of damage
4. I’ll be retiring at 68 not 65 and the WASPIs are furious at the increase from 60 to 65.

There are maybe other scenarios that are not too far fetched. I always felt it was prudent to expect nothing and prepare accordingly.

The 2019 look ahead for GFF

I recently get a pension quote from the HMRC. Do it yourself now just to know what you are entitled to.

I’ve worked accumulated 17 years of NI contributions and that means I’ll get £78.11 a week (£4,062 a year) from the age of 68 in around 30 years time. That 17 should increase over the years. I book this £78.11 as being worth £48,741 as an asset (assuming that I receive it at 68 and die at 80 meaning 12 x £4,000).

I value my final salary at 20x the annual value which is conservative

For the Lady, she’s only worked accumulated 9 years and therefore gets nothing. That’ll change probably next year to 10 years and she’ll be entitled to receive a state pension. By then our combined state pension will be worth about £135 a week or £7,000  a year!

Since we are claiming child benefit, we are entitled to a full NI stamp until the youngest is 12 – meaning another 10 or so years of pension accumulation. Based on that, we should be quite ok for getting towards a full state pension regardless of what else goes on in our lives.

Counting your chickens

So, I could include the state pension in our net worth. I include my final salary pension (payable from 60) but not the state pension. Maybe I should? It would certainly flatter my numbers.

But, the purpose of my net worth calculation is to do a few things

1. Measure and monitor spending
2. measure and monitor income
3. look at where money is invested and allocate it
4. look at how investments are performing and other metrics
5. allow planning and prediction for the future

And it is point number 5 that is maybe most important for any early retirement ideas. And like many in the same position – it is the time between early retirement and access to retirement nest eggs that is important. If I could access all of our money now, then we could probably retire completely. But a lot of money is tied up until we turn 58/60/65/68 which is 20+ years away.

Including the state pension as an asset in my net worth would make pensions contributions now (at the expense of early retirement) seem foolish. Who wants the finest champagne at their funeral or a gold plated coffin?

Floor and upside

7 circles has a good way of thinking about your money. I view the state pension as a floor on income and an insurance policy against living too long. It’s not too dissimilar to an annuity which has the advantage of giving you a guaranteed income for life!

How much the state pension is then both what fraction of it we get and how much it is in total are two variables that I don’t want to guess now in 2019.

Who knows if the money I have now will last it til I am 68. I could spend it all and arguing over what SWR to consider for the next 30-50 years is a bit of a moot point. By the time I am old enough to get my state pension I’ll either desperately need it or not. It might be too late to start earning money again – so in that way it doesn’t need to be counted on in 2019 when I won’t get it until 2050+.

So, the state pension and my final salary pension will provide a floor in retirement. Our pension savings should provide a bit of upside – another 20-30 years of growth could mean that they are worth a lot when we come to draw them down. And for the mean time, we have savings in place that should produce an income that we can live off – and I’ll be using a more aggressive SWR of 5% for that money.

So, I can appreciate how many people think of the state pension as an asset. But I’m not counting on it just yet – it’s like an insurance policy but since I can’t make it grow any faster or do much with it, it’s a distraction from the rest of the family finances .

Thanks, GFF