THE government could change the way the annual State Pension rise is calculated because of Coronavirus.
Pensioners are expected to get a bumper pay rise next year because the economy has bounced back as lockdown has lifted.
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The State Pension rises each year in April at a rate that’s the highest of three things: average earnings, inflation or 2.5%.
This is know as the “triple lock” and is in place to ensure that pensioner’s income rises enough each year.
But the pandemic has skewed wage growth, and average earnings could be as high as 8%, which would increase the retirement benefit by more than £700 a year.
The government is now considering a “double lock”, according to The Telegraph, which would see a one off calculation which does not include this high rate of wage growth.
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it so it’s compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year on retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £179.60 a week and you’ll need 35 years of national insurance contributions to get this. You also need at least ten years’ worth of national insurance contributions to qualify.
- Basic state pension – If you reached the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £137.65 per week and you’ll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.
The Chancellor Rishi Sunak is considering a State Pension rise based on either inflation or 2.5% as one of the options, according to the newspaper report.
Inflation is also currently at 2.5% but the rise is based on the consumer price index for September this year and could be higher.
Rebecca O’Connor, head of pensions and savings at Interactive Investor, previously told The Sun that the State Pension rate is likely to be higher than 2.5%.
The Sun has previously reported that Boris Johnson is considering dropping the triple lock, which could add £3bn to the government’s welfare bill.
The Sun revealed last week that Tory MPs were being sounded out about their thoughts on whether there could be changes to the triple lock.
Another option being considered is measuring wage growth over two years rather than just a single year.
The state pensions is currently worth up to £179.60 per week, for those under the new system and who have paid National Insurance for 35 years.
A rise of 8% on the current rate would add around £14 a week to this amount.
If the increase was 2.5% it would add around £4.50.
The state pension increased by 2.5% for April 2021 using the triple lock formula and rose by 3.9% in 2020 based on wage growth.
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