I am aged 78 and have been receiving my state pension for the last 13 years. I know that my state pension will increase in April. Can you tell me how much it will increase by?

Leonard

Rachel Vahey, AJ Bell Head of Public Policy, says:

The media has recently been full of the 4.1% increase to state pensions, which comes into effect next month. And whereas that figure is true, the headlines don’t give the complete picture as the increase only applies to some parts of the state pension.

UNPICKING THE COMPLEXITY

Let’s start by unpacking some of the complexity of the state pension. There are two main forms of state pension: the basic state pension and the new state pension.

The new state pension can be claimed by anyone who reached state pension age on or after 6 April 2016. The state pension age is currently 66 for both men and women, and will start to go up from April 2026, eventually reaching age 67 from April 2028.

Before that, women’s state pension age was originally going to gradually increase from age 60 to 65 over the period 2010-20. However, these changes were brought forward, and men and women’s state pensions were equalised at 65 by November 2018 and then increased to age 66 from April 2020.

Broadly, you need to have paid national insurance contributions for 35 years to qualify for the full new state pension, and you still get something if you have paid in for 10 or more years.

For anyone who reached state pension age before 6 April 2016, their state pension is split into a basic state pension – which you get in full if, broadly, you had paid 44 years of national insurance contributions, and you still get something if you had paid in for at least 11 years – and the additional state pension.

Over the years there have been two different forms of the additional state pension - SERPS (state earnings-related pension scheme) and S2P (state second pension), as well as its predecessor, the graduated pension, all of which depended on your earnings.

So, now we have got those facts lined up let’s look at increases to the state pension.

The state pension is guaranteed to increase in line with the triple lock guarantee. This means it will increase in April by the highest of:

• The increase in prices measured by the Consumer Price Index in September the previous year.
• The increase in earnings for May to June of the previous year or 2.5%.

Last year the increase in earnings was the highest of these at 4.1%.

From next month the full basic state pension will increase by 4.1% to £169.50 a week; and the full new state pension will increase to £221.20 a week. But although both are receiving the same percentage increase, because the basic state pension is starting from a lower amount it will receive a smaller increase in pounds and pence – an increase of around £363 a year compared to the new state pension increase of around £472 a year.

NOT ALL ELEMENTS WILL SEE THE SAME INCREASE

However, not all elements of state pension will increase by 4.1%. The additional state pension – whether it’s SERPS, S2P, or the graduated pension – is due to increase in line with price inflation (CPI), which was 1.7%. This can seem a particularly bleak outcome for some pensioners, in a year when the triple lock guarantee was so much higher, and where the current inflation rate is 3.9%.

It’s worth remembering that many people contracted out of the additional pension (by paying lower national insurance contributions), instead building up their workplace and individual pensions. Consequently, some have a higher pension than they would have under the additional pension.

Having said that, there is no reason why this part of the state pension is not also protected by the triple lock guarantee. However, any government plan to further extend the triple lock guarantee is probably unlikely.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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