- The state pension rises every April but different people receive different amounts
- With inflation eating away at your income it's important to make sure your National Insurance record is complete
Pensioners in the UK have little wiggle room to manage sky-high inflation as the state pension only just covers the average cost of retirement, new research shows.
With inflation running in double digits and likely to stay higher for longer, it is vital those in retirement know exactly how much their state benefits pay so they can plan accordingly.
The 2022-23 UK state pension only pays £114 a month more than the average cost of being a pensioner, according to research by Almond Financial, an adviser firm. This is a mere 16 per cent buffer for those in retirement.
The benefit also compares poorly against those in the rest of Europe, Almond’s research shows. It compared the state pension to the average cost of living in the UK versus similar data in all of Europe’s 50 countries, with the UK in 16th place. The top-ranked Spanish pension system pays out a maximum of €2,617 per month, around £1,400 more than the UK, and more than four times the average monthly cost of living. Sam Robinson, principal financial adviser at Almond Financial says: “There isn’t much room to manoeuvre for those battling the cost-of-living crisis. And while it is positive that the UK finds itself among the top half of countries, for how much longer is the question.”
How does the state pension work?
The UK already devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies, according to research published by the House of Commons Library. The system also ranks among the lowest for the “pension replacement rate of average salary” metric calculated by the Organisation for Economic Co-operation & Development. This is despite the “triple lock” promise which is meant to increase the state pension by the previous September’s inflation reading, average wage growth or 2.5 per cent – whichever is higher. In April 2023, for those who retired after 2016, the full state pension will rise by 10.1 per cent to £10,600 for the tax year 2023-24.
But this will not apply to all. The state pension is based on your National Insurance record, with two different systems for claiming it. The amount of ‘qualifying years’ that you need for the full amount depends on factors including whether you're male or female, your record of employment and when you were born.
The older state pension, for those who reached state pension age before 6 April 2016, has two-tiers. It consists of a flat-rate ‘basic pension’ worth up to £141.85 per week in 2022/23, rising to 156.20 per week in 2023/24, and an earnings-related ‘additional state pension’ also known as ‘state second pension’ or SERPs.
For those who reach state pension age after 6 April 2016, the ‘new state pension’ is a flat-rate pension worth up to £185.15 per week in 2022-23, rising to £203.85 for 2023-24. The full amount is payable to people with 35 qualifying years in their National Insurance record between age 16 and the state pension age. If you have fewer years, you may qualify for lower amounts, and to get any state pension you will need at least 10 qualifying years.
You gain a NI record for years in which you were working and paid National Insurance contributions, or you were receiving National Insurance credits, for example if you were unemployed, ill or a parent or carer. Stay-at-home parents or guardians will get credits if they are registered for Child Benefit for a child under 12 – and some grandparents who care for children may be able to get them too.
But you may end up with gaps in your NI record if you were: employed but earned less than the NI threshold; unemployed and were not claiming benefits; self-employed but did not pay contributions because of small profit or lived or worked outside the UK
It’s advisable to check your National Insurance record online to see what you’ve paid and the credits that you’ve received, plus if you can pay voluntary contributions to fill any gaps and how much this will cost.
There’s also a safety net, if you do not have enough qualifying years and no private income. Pension Credit is a means-tested benefit which tops up pensioners’ incomes to a guaranteed minimum level just below the level of the full new state pension: In 2022-23 this paid £182.60 per week for a single person and £278.70 per week for a couple.
What happens to my state pension when I die?
Generally, when you die, your state pension will stop being paid. However, there are a few situations where your spouse or civil partner might inherit some of the benefits. The rules are complex and depend on what each of you have built up and when each of you reached state pension age.
Unfortunately, a scandal is still unravelling involving underpayments to married, divorced or widowed women who reached state pension age before April 2016. These women should have received up to 60 per cent of their husband’s basic state pension entitlement, but errors made by the Department for Work and Pensions meant this didn’t happen. The DWP is still working through the cases, with the average compensation payout being almost £9,000.
How long will the state pension last?
Anyone under the age of 40 needs to plan for a much-reduced benefit that will be paid much later in life. The state pension age has already been gradually increasing and now depends on when you were born. It used to be lower for women but equalised at 65 in November 2018. The state pension age is currently 66. Two more increases are already due: a gradual rise to 67 for those born on or after April 1960 and an increase to 68 between 2044 and 2046 for those born on or after April 1977.
The government is legally required to review the pension age regularly and is due to publish the findings of its current review early in 2023. Many think the state pension age will rise to 70, after the ministers announced a review that promised to balance important factors including fiscal sustainability, the economic context, the latest life expectancy data and fairness both to pensioners and taxpayers. Meanwhile, the valuable triple lock is under threat too, meaning future benefits could be watered down.
The triple lock policy was introduced in 2010. Mostly since then, the 2.5 per cent figure consistently outstripped inflation and wage growth, meaning pensioners as a group enjoyed higher ‘pay rises’ than most workers. However, last year, the triple lock was temporarily suspended due to average wages being artificially inflated due to the pandemic furlough scheme.
Tom Selby, head of retirement policy at AJ Bell, says: "If part of the rationale for introducing the triple lock was to provide stability and certainty for retirees, it has done anything but in the last few years.
"The manifesto promise wasn’t worth the paper it was written on in 2022, with then-Chancellor Rishi Sunak deeming the spike in average earnings post lockdown – which would have meant hiking the state pension by around 8 per cent – too expensive. As a result, in April 2022 the state pension rose by 3.1 per cent instead, in line with the September 2021 inflation figure."
The debate resurfaced in 2022, as inflation ran at 10.1 per cent, and the seemingly difficult political optics of handing pensioners a huge pay increase amid huge tax increases and austerity for workers. However, Chancellor Jeremy Hunt honoured the pledge in the end.
Although pensioners will see double-digit payment increases in April, the future of the triple lock is very uncertain. Mr Selby explains: “If it is maintained forever, at some point in the future the value of the state pension will rise above average earnings.”
Jonathan Watts-Lay, director of Wealth At Work, says: “I don’t think it’s sustainable in the long term. It will go because it is very costly. But it’s hard to imagine that would happen before the next election.”
