I was born in 1948 and get the lower basic state pension. I also have additional SERPS and widower’s pension.
Do these go up with the annual percentage rise as I only seem to get the percentage rise applied to my basic pension?
I also have been unable to get a breakdown of how my pension is made up. Any help would be appreciated.
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION
State pension: How are annual increases worked out for the basic, SERPS and widower’s elements?
Steve Webb replies: With prices rising rapidly, there is going to be a lot of focus on how pensions will increase in April, so I hope I can explain how the annual increases are worked out.
Unfortunately, the forthcoming increase is very unlikely to keep pace with the rising cost of living, so you are likely to face a financial squeeze in 2022/23.
Starting with the state pension, you mention that you come under the ‘old’ system for those who reached pension age before 6 April 2016.
Under this system there are different elements to your state pension and the rules around annual increases are different for the different elements.
The main part of your state pension is called the ‘basic’ pension, currently paid at a maximum weekly rate of £137.60 for those with a full history of National Insurance contributions.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
This is also the maximum basic pension for a widower, such as yourself, where a pension may be based on the contributions of a late spouse.
By law, the rate of the basic pension usually has to rise each year by at least the growth in the average earnings of those in work.
The idea is that if, for example, people in employment get 4 per cent pay increases, then the basic state pension would also rise by at least 4 per cent.
As you may have read, there was a big debate a few months ago about whether this was the right approach to adopt, given the way that the pandemic had affected the jobs market.
In simple terms, wages were depressed in the early months of the pandemic (in 2020) due to things like the furlough scheme, whereas by 2021 wages had generally recovered a lot of lost ground.
Simply comparing 2021 wage levels with those in 2020 would have produced a big surge (of over 8 per cent) and the Government decided that this would not be a sensible basis to use for the next pension increase.
In response to this the Government passed an Act of Parliament so that *for one year only* the basic pension would simply rise in line with inflation.
The specific measure used was the increase in the Consumer Prices Index (CPI) for the year to September 2021, which showed an increase of 3.1 per cent.
As a result the basic state pension element of your total pension will rise by 3.1 per cent in April 2022.
As we know, inflation has already gone up a lot further, and even by November 2021 the CPI inflation figure was 5.1 per cent.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
Despite this, and even though inflation is widely expected to be even higher by April, the Government currently plans to stick to the 3.1 per cent figure.
The rest of your pension is made up of what is called ‘additional’ state pension (also called SERPS or the State Second Pension) and ‘graduated retirement benefit’ (based on work you may have done in the 1960s and early 1970s).
By law, this always increases in line with price inflation, so these elements will also rise by 3.1 per cent in April 2022.
For future years, the Government has said it will revert to the more generous ‘triple lock’ policy, where the *basic* state pension goes up by the best of the rise in average earnings, prices or a floor of 2.5 per cent.
But ‘additional’ state pension will still be pegged to inflation. This is why different parts of your pension can go up by different amounts.
I should add that these calculations could be slightly different if either you or your late husband was a member of a company pension scheme which was ‘contracted out’ of part of the state scheme.
In this case there is a slightly more complex interaction between the increase you get from your state pension and the increase you get from your company pension.
For those who come under the ‘new’ state pension (who reached pension age from 6 April 2016 onwards), the rules are slightly different again.
All payments of new state pension up to the standard flat rate figure of £179.60 are treated in the same way as the old ‘basic’ state pension.
This means they rise by 3.1 per cent in April 2022, and by the ‘triple lock’ formula in future years. Anything above the £179.60 flat rate is simply linked to inflation.
To get a breakdown of the different elements of your state pension you can contact the Pension Service though phone lines are generally rather busy and you may find it easier to write and wait for a written response.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
TOP SIPPS FOR DIY PENSION INVESTORS