Why the state pension increase is a kick in the teeth for many
While many pensioners will welcome the increase, the uplift is a sharp contrast to this week’s inflation figures, which showed prices rising at seven per cent. These rapid price rises are particularly bad news for older people, who cannot lobby for wage increases to offset inflation, and often spend a disproportionate amount of their income on some of the most rapidly rising items, such as food and fuel.
“How can those depending on the State Pension hope to make ends meet?” asked pensions expert Baroness Ros Altmann, after the Chancellor’s Spring Statement failed to provide any comfort for those above working age.
“There is no relief for pensioners, especially the poorest, who cannot work anymore, due to age and infirmity. They were promised proper protection at the last election, but have seen it snatched away.”
The state pension, and how it is protected
This week’s inflation figures and faltering pension uplift illustrate the folly of relying on the state pension for retirement. While the pension is paid to everyone when they reach state pension age, provided that they have paid national insurance, there are many reasons not to see it as a certain source of income. These include:
- Changes to the age at which you can claim your state pension
Not everyone wishes to work until they are in their late sixties, but the age at which you can receive your state pension has been rising rapidly, and could rise again. At present, the state pension age is 66, and this will rise to 67 for those born on or after April 1960. It is scheduled to rise further still, to 68 for those born on or after April 1977, while there is a review underway at present to decide whether it could rise even further.
- No guarantees of inflation protection on state pension payments
The state pension has been protected by what is known as the ‘triple lock’, meaning that it rises each year in line with the highest of three possible figures, inflation, average earnings or 2.5 per cent.
However, during the pandemic, part of the lock was suspended, meaning that pensions increased by 3.1 per cent, whereas under the ordinary system it would be 8.3 per cent.
The UK Government has said it remains committed to using the triple lock for the rest of the current parliament, but there’s no guarantee that it will continue beyond that. For those of us who will not retire for some time, therefore, there’s little certainty that state pension payments will keep pace with rising prices.
- An amount that is insufficient for most pensioner living expenses
A study from consumer advice group Which? showed that most of us need more than the state pension to survive. The average spent by pensioner households is £2170 a month, which is far more than the £180 a week received by those in receipt of a full state pension. Even with two members of a household receiving the money, there would still be a shortfall.
Inflation proofing your pension income
With income from the state pension uncertain and kicking in too late for many people’s retirement plans, it is more important than ever for everyone to put money away for retirement.
Here are some ways to make sure you save efficiently.
- Use the tax breaks available
The government gives very generous tax breaks to help us to save for retirement, meaning that those in higher tax brackets can reclaim the tax they’ve paid. Make the most of this by paying into a workplace pension or SIPP.
- Take appropriate risk
Longer-term investing can also help your money to grow faster than inflation, although you can expect some volatility along the way. Historic studies show that money in equities outpaces that in cash and other less volatile assets over most long periods of time, so taking some risk with investments that you will not need to use for a while makes sense.
- Take advice
If you’re unsure whether you’re on track for the retirement you want, speaking to a financial adviser can help you to understand whether more action needs to be taken. Using resources such as cashflow modelling, they will be able to show you how much you will have by this stage, how best to spend it in a tax efficient way in retirement and any steps you will need to take now to achieve your goals. Regular reassessment is also sensible to ensure you do not go off track.