What is the true cost of the UK state pension?

pension  Elderly best friends playing chess in public park, sitting on the park bench. Senior women enjoying free time, having fun together. Two female residents playing chess in nursing home garden. Concept of friendship and free time activities in retirement.
The debate continues to rage on the state pension as some describe it as the worst pension in the developed world. (Halfpoint Images via Getty Images)

Pensioners got a welcome boost to their income this month with an 8.5% increase in their state pension.

This brings the value of the full new state pension up to £11,502 per year and those on the full basic state pension will see it rise to £8,814 per year. With inflation finally on a downward path this rise will bring some much-needed breathing space to pensioner budgets that have been stretched to their absolute limits by the cost of living crisis.

For the majority of pensioners, the state pension forms the very foundation on which we build our retirement income. However, it comes in for its fair share of criticism.

Read more: How to avoid tax creep in retirement

Despite two sizeable increases in recent years, it has been described as the worst pension in the developed world. These comparisons could be unfair given that state pension provision set ups differ between different countries so it’s very difficult to make direct comparisons.

Could you match the state pension with your own pension planning?

If you want to get a sense of the true value of the state pension, then you can look at how much you would need to save into your own pension to match it. The results are sobering.

Data from Hargreaves Lansdown’s annuity search engine shows you would need a pension pot of roughly £125,000 at age 65 to buy an annuity paying out enough to replicate what you would get from the basic state pension. If you are looking at generating enough to match the full new state pension you are looking at £165,000. An annuity is a product that converts your pension to pay out a guaranteed income for life.

However, these annuities deliver a level income that doesn’t change every year. This is unlike the state pension which is increased every year by whatever is the highest of 2.5%, CPI inflation and average wages.

Read more: How to supercharge your pension this year

If you wanted an annuity that paid an income that increases every year, then you would need to put away much more again. You would need around £190,000 in your pension to get a single life annuity that starts at around the level of the basic state pension and then increases in line with RPI. To do the same for the new state pension you are looking at closer to £250,000.

It’s worth saying that these aren’t fixed figures. Annuity rates move up and down regularly so you may get more or less income depending on when you annuitise.

The debate continues to rage on the state pension. There are those who argue it needs to be raised versus those who say it costs the government too much. However, whichever side of the argument you favour it is clear that the state pension is a valuable benefit that many would struggle to match with their own pension planning.

Watch: Is a UK state pension enough to survive on in retirement?

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