The state pension is unlikely to be enough to live on by itself, but with an employer’s pension and perhaps a personal pension as well, it can be a vital piece in a retirement income jigsaw.
So any change in the state pension needs to be watched carefully.
At Continuum we are looking at the changes for 2021 and what you can do if the increase still leaves you short of the level of income you need.
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What has changed?
The state pension is reviewed each year under the arrangement known as the triple lock. This was introduced in 2010 and guaranteed to increase the state pension every year by inflation, in line with average earnings or by a minimum of 2.5% per year, whichever was higher. Thanks to Covid, inflation for last October came in at just 0.5%,while average earnings in the three months to July actually dropped by 1%.
That is why the 2.5% ‘lock’ has come into play, meaning that is how much the State Pension increased by from April 2021.
So the good news is that thanks to the triple lock pledge State Pension has increased for 2021. Those receiving the full New State Pension will have already seen their weekly payouts boosted by £4.40 per week, taking them to £179.60 per week. Those with 35 years of national Insurance contributions will therefore be able to enjoy £9,339 a year from the state.
If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules, and get a basic State Pension. The ‘old’ basic-rate state pension increased to £137.60 per week, meaning a total of £7,155.20 a year. There are ways you can increase your State Pension up to or above the full amount, with an Additional State Pension – if you did not contract out while you were working.
The bad news is that this annual increase might not be quite so dependable in future.
What could go wrong with the triple lock?
Popular though the triple lock may be with pensioners, it is costing the government money that it simply does not have. Chancellor Rishi Sunak touched on state pension during his March budget when he set out the UK’s post-Covid fiscal policy. With falling tax revenues thanks to Covid and ever larger numbers entitled to state pension, the treasury needs to tighten its belt.
With the government needing to watch its spending, there has already been speculation about the future of the triple lock. But even though the Chancellor Rishi Sunak has given it a reprieve for this year, it could become unaffordable.
A combination of unprecedented government spending, pent up consumer demand and low productivity is a recipe for rising prices. Inflation could return – and that will impact the triple lock.
With recovery, inflation and wages look set for big increases. This means that next year could see pensioners in line for record increases in state pensions. It could mean the government is forced to abandon the triple lock, because it simply cannot afford it any longer.
Planning for your future
Planning for a retirement where the State pension is even less generous than now could be challenging, but the simple truth is that the sooner you start preparing, the easier it could be to secure the kind of retirement income you need.
If you are an employee, you will almost certainly have an employer’s pension plan working for you under Automatic Enrolment rules. But the returns may still not be as great as you want to enjoy a comfortable retirement.
A private pension plan could be the answer. Thanks to tax relief every pound in your pension fund costs you much less than a pound to put in – helping ensure that a pension can be one of the best investments you could ever make.
It’s never too early to start a private pension, but there are many pension providers and finding the provider and the plan that is right for you will be much easier with help from a Continuum Adviser.
Call us at Continuum now. Even if in person meetings are still difficult, we can provide our full personal service via the phone or with a video call.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate taxation advice.