The Salary Calculator

Pensions in the current climate

by Madaline Dunn

Recently, there have been lots of government budget announcements and a number of changes made in regard to pensions. These changes come alongside discussions around potential alternations to pensions in the future. With such a raft of changes, it can be difficult to know where you stand or how exactly you’ll be affected.

At The Salary Calculator, we’ll walk you through all the information you need to understand pensions in the current financial climate in a straightforward way. We’ll cover the following:

• The triple lock and discussions around its replacement
• The increase the state pension
• The pension age increase
• Upcoming changes to tax payments for retirees

The triple lock

The triple lock was a pledge made by the Conservatives in their 2019 manifesto but was broken over the pandemic. Now, despite doubts, it has been reinstated under the new budget. It ensures that pensions increase in line with either:

• The average wage increase,
• Inflation, or
• 2.5%

As such, there will be a 10.1% increase in State Pensions from April 2023.

According to experts, the government has considered scrapping it altogether and replacing it with a new system following the next election. Some commentators have also forecast that, in the future, state pension entitlement could eventually become means-tested, a model that is currently present in Australia. A means-tested pension top-up was also proposed by former Chancellor Gordon Brown back in 2002.

This kind of means-tested pension is not without its critics, though, and with recent whisperings of this kind of model being proposed, former Pensions Minister Baroness Ros Altmann claimed it would be “disastrous.” Altmann, for example, outlined: “Without a decent basic state pension underpin for everyone, the real risk is that more pensioners will end up poor in retirement and this will damage long term growth for us all.”

The increase in the state pension

As per the triple lock, pensions will rise in line with September’s Consumer Prices Index (CPI) measure of inflation. So,

From April 2023, payments will be as follows:

• £203.85 a week, up from £185.15 for the full, new flat-rate state pension (for those who reached state pension age after April 2016).
• £156.20 a week, up from £141.85 for the full, old basic state pension (for those who reached state pension age before April 2016).

Increasing the pension age

The UK is currently in a recession, and the Treasury is frantically searching for ways to raise money. One of the proposals that would reportedly raise billions is increasing the pension age. As per current legislation, the retirement age is to rise to 67 by 2028. By 2039, this is set to increase further to 68. However, ministers are pushing to increase the pension age to 68 by up to six years earlier in 2033.

Some experts say that if this goes ahead, those who are currently in their 50s will receive £10,000 less when they retire.

New Work and Pensions Secretary Mel Stride has now confirmed that the outcome of the State Pension age review will be published before May 2023 – so a final decision is coming soon. Stride was recently grilled on potential upcoming changes to pensions in the Spring budget. When asked whether or not the portion of people’s lives spent in retirement should shrink (currently at one-third), he said he couldn’t be drawn on what his thoughts are “at this stage” and questioned whether John Cridland’s (who led a previous review of the state pension age in 2017) was right in his calculation of one-third.

WASPI – Women Against State Pension Inequality, meanwhile, has called for the government to introduce fairer policies. Jane Cowley, director of Waspi, for example, said that the government needs to “look less at average figures” and “take greater account of the lives of people in economically disadvantaged areas.” She added: “Often in these areas there is a drastically lower life expectancy and very few years spent in good health during retirement.”

Likewise, Angela Madden, chair of Waspi, said: “Ministers need to recognise that while we are living longer, people in their late 60s and early 70s tend to be in declining health.” Adding: “It isn’t right to expect everyone to work full-time till they drop.”

Upcoming changes to tax payments for retirees

According to reports, if the UK Government increases State Pensions by 10.1% next April, although 12.5 million people would see a boost, another 500,000 could be included in the “tax net.”

Former Liberal Democrat pensions minister and partner at pensions specialists LCP (Lane Clark & Peacock), Sir Steve Webb, explained that this is because of the freeze on tax thresholds, coupled with the increase in pensions.

Elaborating on this, Nimesh Shah, the chief executive of Blick Rothenberg, on the BBC Money Box podcast, called this a tax increase “by the back door.” He continued: “Everyone uses the word stealth tax increase. They didn’t want to increase the headline rate in the run-up to the next general election.” Shah said that this is an example of the fiscal drag effect: “Someone’s wages go up but they are paying more income tax because of those frozen allowances. The state pension is increasing by 10 percent which is great news but pensions are now going to get dragged into income tax.”

 

Tags: cost of living crisis, pension, pension age, retirement, state pension