Millions of state pensioners will not get full triple lock hike – check if you’re one | Personal Finance | Finance
Whenever the annual increase in the state pension is discussed, it raises hackles. Journalists (including me) use the headline rate for the new maximum state pension, currently £10,600 a year, as if it applies to everyone. But many retirees get much, much less than that.
And that is not the only point of confusion. The state pension has a number of different features, not all of which benefit from the triple lock of the state pension.
Retirees often complain that they get a lot less than people think and they are right. It paints a false picture of the financial difficulties millions face in retirement. This is how it happens.
The new state pension is paid in full to someone who has made 35 years of qualifying National Insurance (NI) contributions during their working life.
Every year they fall short of that target, they lose 1/35 of their pension, costing them £302.86 a year.
It may be possible to make up any shortfall, say, by claiming NI credits or making additional voluntary contributions, but not everyone can do that.
The new state pension is only paid to those who retired from 6 April 2016.
Most pensioners reach retirement age before that date, and therefore receive the basic state pension, which works differently.
Today, the basic state pension pays a maximum of £8,122 a year. That’s a whopping £2,478 less than the new state pension, leaving many older pensioners reeling.
Especially since men who retired before 2010 had to make 44 years of NI contributions to get the maximum amount, or 39 years for women.
That was cut back to 30 years for the last six years of the scheme.
As if that wasn’t complicated enough, there’s something else.
Many on the basic state pension also receive an additional state pension, in the form of an earnings-related state pension scheme (Serps) or a second state pension (S2P).
This means that many people get more than the new state pension, depending on how long they worked and how much they earned. Men tend to do best here.
It doesn’t work so well for women, though. They usually did not earn as much additional state pension because they had lower earnings or gave up work to raise a family or care for relatives. Finally there were big gaps in their record in NI and they get less than £8,122 a year as a result.
Increase of means-tested income Pension Credit it will increase a single pensioner’s income to a minimum of £10,455 a year, or £15,956 for couples. However, 880,000 of the poorest people fail to claim.
There is another issue that not many people know about, which was brought to my attention by Sandra Wrench, a former Department for Work and Pensions employee who was her state pensions guru.
The triple lock does vital work to help older people escape poverty, by increasing the state pension by earnings, inflation or 2.5 per cent a year, whichever is higher.
But as Sandra points out, the triple lock only applies to the new state pension and the original state pension. “It does not apply to all the other components including Serps and S2P, and lesser known features such as Phased Pension, Increments and Protective Payment. They only increase by the CPI rate. Very few journalists report that.”
READ MORE: Forget £11,500. Most triple-locked state pensioners get less than £9,000
There are two reasons for that. The first is that the basic element of the basic state pension is lower than the new state pension.
So, while retirees get the same percentage increase each year, older retirees get less because the increase is based on lower initial income.
As Sandra points out, the gap between the two will widen year on year, leaving older pensioners feeling poorer and poorer.
The second issue is that annual increases to S2P and Serps are based on the consumer price index figure for September, rather than the triple lock. This was fine last year as inflation hit 10.1 percent in September last year, as all components had the same increase.
This year earnings are higher than CPI. So, while the new and basic state pension should rise by 8.5 per cent in April (unless Chancellor Jeremy Hunt decides otherwise in his September Statement), everything else will rise by 6.7 per cent.
Pension Credit increases are also based on CPI rather than the triple lock, so the poorest pensioners lose out in years where the CPI is below earnings or 2.5 per cent.
Sandra calls it a two-tier upgrade system. “It leaves those who reached state pension age before 5 April 2016 at a disadvantage to those who hit it later. They will fall further behind with each rating.”
It’s a mess, and nothing is being done to fix it. Sadly, the most likely outcome is the end of the triple lock, leaving all pensioners worse off.
A DWP spokesman defended the difference between the two state pension schemes, noting that the vast majority of pensioners receiving the basic state pension receive additional income from an occupational or private pension, if contracted out, or an additional state pension.
In many cases, they will get a combination of both. The DWP has also said that men and women should receive similar amounts under the new state pension by the early 2040s, more than a decade earlier than under the old system.
But that will do little to help those who are struggling today. And there are millions of them.
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