Rises in the State Pension are presently calculated on the basis of something called the ‘Triple lock’. This means that payouts always increase by whatever is the highest, inflation, average earnings or 2.5 per cent.
Previously, any increases were only linked to inflation – but this meant that rises were minimal in some years. Increases were also often discretionary.
The triple lock guarantee was introduced to protect pensioners from meaningless increases, such as the 75p a week increase that was given in 2000, and to make sure their income was not eroded by the gradual increase in the cost of living.
This has been one of David Cameron’s most popular policies, but critics argue that its true value is exaggerated as it only relates to the basic part of the State Pension rather than the whole thing.
So when the increases are made in April of each year any additional payments are subject to the Consumer Price Index (CPI) figure from the previous September.
The triple lock was introduced in 2013 to protect the basic State Pension which is currently £119.30 a week. All the extra elements: such as state earnings related scheme, or state second pension, extra payments from deferrals and from class 3A national insurance contributions are linked to the CPI.
In the past the entire State Pension was linked to the annual Retail Price Index (RPI) as a measure of inflation. In 2011 the Government switched to the Consumer Price Index, which is typically lower than the RPI as it does not include housing costs such as mortgage payments.
Pension top up scheme
The State Pension top-up scheme was introduced in October 2015 and runs for 18 months to 5 April 2017. It allows people who reach pensionable age before 6 April 2016 to pay voluntary National Insurance Contributions and, in return, receive a higher State Pension for the rest of their life.
You can buy additions worth anything from £1 per week to a maximum of £25 per week. The amount you have to pay depends on how old you are – younger pensioners have to pay more because their pension increase will (on average) last for longer.
But beware any increases that you buy as they would be indexed each year, but only in line with the rate of inflation as measured by the CPI.
The same calculations apply to those who opted to continue in work for longer and pay more into the State Pension. If you decide to work over the statutory retirement age and continue to pay National Insurance, the extra weekly sum on your eventual retirement will only come under the CPI increase and not the triple lock.
The triple lock becomes even more complicated when applied to the new State Pension. For those reaching statutory retirement age on or after April 2016 the new amount is £155.65 a week (in most cases). This amount is covered by the triple lock, but if the starting amount is higher any excess only increases in line with CPI.
So the conclusion is, thanks for the triple lock, but don’t plan to splash out next April when you get your pension increase.
If you want to discuss any pensions matter, please contact The Pensions Advisory Service using one of the following methods: call their helpline on 0300 123 1047, or visit their website www.pensionsadvisoryservice.org.uk.