September 10th 2024.
Pensions are set to increase next April, which means pensioners could see an increase of hundreds of pounds in their retirement income. State pensions, which are paid out every four weeks by the government, are tied to various factors, including earnings. However, the amount is not fixed and is subject to change according to the government's 'triple lock' policy. This ensures that state pensions rise each year by the highest of earnings growth, inflation, or 2.5%. The latest inflation figures are not yet available, but today's announcement of new wage growth statistics can give us a glimpse of what the upcoming pension increase might look like.
The Agency has consulted with experts to understand how this news will impact pensioners and those who have not yet reached retirement age. Currently, there are two types of state pensions: the new state pension and the old basic state pension. The former is for individuals who turned 66 after April 2016, while the full, flat-rate state pension is currently at £221.20 per week, equivalent to £11,502 per year. On the other hand, the full, old basic state pension is at £169.50 per week, amounting to £8,814 per year. Based on the Office for National Statistics, average weekly earnings have increased by 4% in the three months leading up to July. Politicians use this data to determine the pension increase, and although it is the lowest in nearly four years, pensioners who have reached the state pension age will see a rise of £460 in their pension pots.
Excluding bonuses, pay has increased by 5.1% in the year up to May to July 2024. This figure includes bonuses, which were up by 4.0%, but it is worth noting that this comparison is affected by last year's one-off payments in the NHS and civil service. In essence, this means that the new state pension will increase to £230.05 per week, or £11,962 per year, while the old pension plan will go up to £176.30 per week, equivalent to £9,167.60 per year. These figures reflect a rise of £353.60 for those on the old pension plan. Although inflation data for September has not been released yet, it was at 2.2% in July. Ultimately, the Work and Pensions Secretary, Liz Kendall, will determine the final pension increase, which will be announced around the time of the Autumn Statement, the first budget of the new Labour government.
The increase in state pensions has received mixed reactions from experts. Clare West, a finance editor at Investing Insiders, states that the news of a potential £400 rise in pensions is certainly welcome, especially during these financially difficult times. However, she also points out that this increase may not be enough to keep up with the current rate of inflation and the ongoing cost of living crisis. Rising energy bills, food costs, and other essential expenses are eating into people's incomes, so although £400 is a step in the right direction, it may not accurately reflect the reality of what pensioners need today. On the other hand, the 'triple lock' policy has undoubtedly benefited pensioners, ensuring that their buying power is not significantly affected by rising prices. However, Clare acknowledges that the policy is not without controversy, as some argue that it financially protects one group at the expense of others. She also warns that if the policy were to change to a single lock, linked to either earnings or inflation, pensioners' spending power would likely be impacted.
To be eligible for a state pension, your age and National Insurance record are significant factors. Currently, the state pension age is 66 for both men and women, with a phased increase to 67 and then 68 for those born after 1960. It is expected to rise further in the future. The decision on eligibility is usually based on your National Insurance record, with at least ten qualifying years required to receive the new state pension. A qualifying year is when you work and make National Insurance contributions, receive any form of National Insurance credit, or pay voluntary contributions. It is essential to note that people need to have contributed towards National Insurance for at least 35 years to receive the full state pension. Antonia Medlicott, the CEO of Investing Insiders, reassures those who may not have clocked in 35 qualifying years that they will still receive a pension, albeit a smaller amount, with just ten qualifying years. To check eligibility, individuals can visit the GOV.UK website and use the 'Check your State Pension' page, which is free, secure, and provides a breakdown of what they will receive and when. Additionally, some may also qualify for an Additional State Pension, which is an extra fund for those not on the new state pension.
The age at which individuals can receive their state pension is 66, although this may change for some in the future. The UK pension age is set to increase to 67 between May 2026 and March 2028, with further increases expected in 2044, when it will rise to 68. However, this is not guaranteed, and some experts believe that it should be even higher. The ageing population in Britain means that there are fewer working-age people supporting the retirement of the elderly. Currently, there are about five workers per retiree when the pension age is 65. However, if this ratio remains the same until 2050, there will only be one worker per retiree. Although Clare agrees that this is a cause for concern, she emphasizes considering the bigger picture. She points out that many individuals in physically demanding jobs or with health issues may struggle to work longer, and a blanket increase in the pension age might disproportionately affect lower-income workers who may not have had the same opportunities to save for retirement.
It is essential to note that the state pension is taxable, but it is usually paid without any deducted tax. However, it will reduce your tax-free personal allowance. Currently, the maximum amount of money one can receive without paying income tax is £12,570, and the full new state pension is £11,502. This means that you will have £1,248 of your personal allowance remaining. Retirees do not have to pay National Insurance, and the amount of tax paid depends on various factors, including the state pension amount, rental income, other pension pots, bank interest, or investment income.
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