Are you baffled by the state pension?
IT GOES UP 10.1% IN APRIL, BUT BENEFIT REMAINS A MINEFIELD
DURING the Autumn Statement, Jeremy Hunt reconfirmed the Government’s commitment to the state pension triple lock. It came after speculation the Chancellor might ditch it, and its survival will have come as some relief to the millions of pensioners who rely on the state pension.
The triple lock pledges the state pension will increase each year in line with inflation, average wage increases or 2.5% – whichever of the three is the highest. This means the new state pension will increase 10.1% in April 2023, taking it to £203.85 a week.
On the face of it this was positive news in an otherwise sobering financial update from the Government, which confirmed we will all feel poorer for the next few years even if we keep our heads above water.
Independent watchdog the Office for Budget Responsibility confirmed living standards will fall at a record rate, the worst “in living memory” according to Paul Johnson, director at well-respected think tank the Institute for Fiscal Studies.
The other good news to come from the Autumn Statement was Pension Credit, paid to the lowest income pensioner households, will also rise next April by 10.1%.
But let’s not get too carried away. Inflation for October hit 11.1%. And for some people the cost-of-living crisis feels far worse than this.
As Andrew Tully, technical director at pensions giant Canada, explains: “A 10% pay rise for pensioners may sound generous, and will be welcome news to the millions struggling to make ends meet.
“Unfortunately, this increase won’t come through until April, and even then, it may not cover the food and energy price hikes pensioners are experiencing today, which in many cases are way above the headline inflation numbers.”
What about the millions of pensioners who retired before 2016, under the old two-tier system?
Here, only part of the state pension is linked to the triple-lock pledge and therefore the unfairness of running two systems is underlined.
Under the triple-lock promise, the maximum basic state pension will rise to around £156.18 a week, or over £47 a week less than those retiring since 2016 under the new state pension, which adds up to almost £2,500 a year.
According to the latest available data, pensioners get an average of £157.63 a week under the pre-2016 state pension, while those who have retired since then receive an average of £168.40 a week.
So why the difference, and why are these numbers less than the headline amounts being quoted?
It really comes down to your working history, how many National Insurance credits you built up over the years, and whether you were contracted out of the state pension at any point during your career.
The state pension is an incredibly complicated system to navigate and understand, while it’s sadly also riddled with errors in calculating what people are due at retirement.
There have been cases where National Insurance credits have been missed or widows’ benefits not calculated accurately.
The bill next year to meet the triplelock promise is £9billion, and in total the state pension will cost the UK £119bn.
It is by far the most expensive benefit given out, but it is well recognised that it isn’t generous by any meaningful measure.
That said, the cost of buying an equivalent income to the maximum state pension with its annual increases is around £300,000.
As we look to the future, what could the state pension look like? It’s becoming clear the triple lock in its current form, although well intended, is not only expensive but pays the same increase irrespective of other wealth. Which means the richest in society benefit as much as the poorest.
With state pension ages set to rise in the future, and perhaps at a faster rate than currently legislated for, the Government is due to publish a review early in the new year looking at revisions to the state pension ages again.
Might we see a reintroduction of means testing – which was ditched with the introduction of the new system in 2016? Would it be possible to calculate how much state pension is paid based on how long someone is expected to live?
Andrew Tully explains: “We need a grown-up conversation on the future of the triple lock. It seems unsustainable in the long-term and, with increases in life expectancy, despite these slowing, the cost of the state pension will continue increasing unless some changes take place.”
But what about the workers of today just starting out in their careers? What certainty can be given that the state pension will be there when they retire?
Andrew concludes: “We will still have a state pension, although it may not take the same form or operate in the same way as the system we have today.
“It’s important when we emerge from this cost-ofliving crisis, which we will, that people take responsibility for their own financial futures and take advantage of the pensions on offer through their employers, to top up the state pension. Only then can they have confidence they’ll be OK in retirement.”
State pension explained
During your working life you pay National Insurance contributions (or you qualify for credits when children are under 12 and you’re a stay-at-home parent, or you are a carer) and these build up to help you qualify for the state pension from the Government. Changes brought in from April 6, 2016, were meant to simplify the system but made it even more complex.
State pension age
This is the age you will start receiving your state pension, currently 66 for men and women.
To help keep costs down this age keeps rising. It became age 66 for men and women in April 2020. It will rise to 67 by 2028 and to 68 between 2044 and 2046. But this could change and rise sooner, between 2037 and 2039.
State pension amounts
The amount you get depends on your National Insurance contributions record and when you reach state pension age.
The current full state pension, for
‘‘ Government is due to look at revisions to state pension ages again in the new year
those who reached retirement age, on or after April 6, 2016, is £185.15 a week, due to increase to £203.85 a week in April, 2023.
To get this you need at least 35 full qualifying years of National Insurance contributions. Those on the olderstyle pension system (ie those who reached state pension age before April 6, 2016) who receive the full amount, currently get £141.85 a week, rising to £156.18 a week in 2023.
Millions of people get more or less than these amounts, depending on their NI record.
Those on the older-style pension may get additional amounts, based on their spouse’s NI record.
From April 6, 2016, the amount people get is based solely on their own NI record.
Some people may get less than they thought because they were “contracted out” of the state pension at some time during their working life. This meant you paid less NI in exchange for getting a higher pension from your workplace or private pension. This was a Government initiative that began in 1978 and ended on April 6, 2016 – and has added another level of confusion.
Know where you stand
Get a pension forecast. Applying online is the quickest way to get a forecast – via gov.uk/check-statepension. You will need to have or sign up for a Government Gateway Account to prove your identity.
You can also fill in a BR19 form and send it by post, or you can contact the Future Pension Centre which will send a forecast to you.
Future Pension Centre Helpline 0800 731 0175, address: The Pension Service 9, Mail Handling Site A, Wolverhampton, WV98 1LU.
This will give details of your National Insurance record and how much state pension you could get, when you can get it and how you may be able to increase it.