Quirk could give you a 20pc state pension boost

Hundreds of thousands of retirees are to benefit from a 20pc boost to their state pensions this week, thanks to a decades-old quirk in the system.

All state pension payments will increase by at least 10.1pc on the back of the Government’s triple lock – the policy that increases the state pension each spring in line with the highest of the previous September’s inflation figure, wage growth or 2.5pc.

It means that the full new state pension will be worth £ 10,600 per year, the first time it has surpassed the £10,000 mark.

Meanwhile, the basic state pension – paid to those who retired before 2016 – will increase to £8,122 per year.

However, hundreds of thousands of pensioners could get an even bigger pay rise, as high as 20pc.

This is because anybody who retired before 2016 has a state pension that is made up of two parts: a basic pension and an “additional” pension.

The additional state pension applies to rights that you may have built up between 1978-79 and 1996-97 under the “state earnings-related pension scheme”, known as “Serps”.

The most that anyone can receive from Serps on top of their basic state pension is £ 185.90 per week, which increases to £ 204.68 from last Thursday.

It could give a pensioner a pay rise of up to 20pc, according to estimates from the consultancy LCP.

Sir Steve Webb, former pensions minister and now partner at the firm, said that Serps could give hundreds of thousands of ret irees a pay increase well above current rates of inflation.

“It would affect people who were in a ‘contracted out’ workplace pension for a long period of time after 1978 when Serps started, such that the guaranteed minimum pension (GMP) wiped out the Serps pension they would otherwise have built up over that period,” he said.

The GMP is a minimum retirement income that a workplace scheme provides to those people who were contracted out of the additional state pension from April 6 1978 to April 5 1997.

However, while millions of state pensioners prepare for their biggest pay rise in decades, the future of the valuable triple lock has been thrown into doubt.

An independent report by Baroness Neville-Rolfe recommended last week that national spending on the state pension should be capped at 6pc of gross domestic product.

It currently stands at 4.8pc of GDP, but is expected to surpass 6pc in just three decades. Such a cap could force the Government to scrap the triple lock or even bring forward the official retirement age.

However, the Government has not committed to such a recommendation and said there was significant uncertainty around the proposal.