Whenever the annual state pension increase is discussed, it raises hackles. Journalists (including me) use the headline rate for the maximum new state pension, currently £10,600 a year, as if it applies to everybody. Yet many retirees get much, much less than that.
And that’s not the only point of confusion. The state pension is made up of several different elements, and they don’t all benefit from the state pension triple lock.
Pensioners often complain that they get much less than people think and they’re right. It gives a false impression of the financial struggles millions face in retirement. Here’s how it happens.
The new state pension is paid in full to somebody who has made 35 years of qualifying National Insurance (NI) contributions during their working lifetime.
For each year they fall short of that target, they lose 1/35th 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 voluntary extra contributions, but not everyone can.
The new state pension is only paid to those who retired from April 6, 2016.
The majority of pensioners hit retirement age before that date, and get the basic state pension as a result, which operates differently.
Today, the basic state pension pays a maximum £8,122 a year. That’s a staggering £2,478 less than the new state pension, which makes many older pensioners feel cheated.
Especially since men who retired before 2010 had to make 44 years of NI contributions to get the maximum sum, or 39 years for women.
That was cut back to 30 years for the final six years of the scheme.
As if that wasn’t complicated enough, there’s something else.
Many on the basic state pension get additional state pension on top, in the form of state earnings-related pension scheme (Serps) or state second pension (S2P).
This means many 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 out so well for women, though. They typically didn’t earn as much additional state pension as they had lower earnings or gave up work to raise a family or care for loved ones. Many ended up with huge gaps in their NI record and get even less than £8,122 a year as a result.
Means-tested income top-up Pension Credit 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 fail to claim.
There’s another issue that many people are much less aware about, highlighted to me by former Department for Work and Pensions employee turned state pension guru Sandra Wrench.
The triple lock does vital work in helping elderly people escape poverty, by increasing the state pension either by earnings, inflation or 2.5 percent each year, whichever is highest.
Yet as Sandra points out, the triple lock only applies to the new state pension and the basic state pension. “It doesn’t apply to all the other components including Serps and S2P, and lesser-known elements such as Graduated Pension, Increments and Protected Payment. They only increase by the CPI rate. Very few journalists report this fact.”
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There are two reasons for that. The first is that the core element basic state pension is lower than the new state pension.
So even though retirees get the same percentage increase each year, older pensioners get less because the uplift is based on a lower starting income.
As Sandra points out, the gap between the two will widen year after year, making older pensioners feel poorer and poorer.
The second issue is that annual hikes 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 every component enjoyed the same uplift.
This year earnings have outpaced CPI. So while the new and basic state pension should both rise by 8.5 percent in April (unless Chancellor Jeremy Hunt decides otherwise in his Autumn Statement), everything else will rise by 6.7 percent.
Pension Credit increases are also based on CPI rather than the triple lock, so the poorest pensioners lose out in years where CPI is below earnings or 2.5 percent.
Sandra calls it a two-tier uprating system. “It leaves those who hit state pension age before April 5, 2016 at a disadvantage to those who hit it afterwards. They will fall further behind with each uprating.”
It’s a mess, and nothing is being done to sort it out. Sadly, the most likely outcome is that the triple lock is axed, leaving every pensioner worse off.
A DWP spokesperson defended the difference between the two state pension schemes, noting that the vast majority of pensioners who receive the basic state pension get additional income from either an occupational or private pension, if they contracted out, or additional state pension.
In many cases, they will get a combination of the two. The DWP has also pointed out that under the new state pension, men and women should get similar amounts by the early 2040s, more than a decade earlier than under the old system.
Yet that will do little to help those struggling today. And there are millions of them.
