Why has my state pension gone up by 1.6% instead of 2.5% this year?

I have just received notification of my weekly amount of state pension for this year, albeit 3 weeks after the date at the top of the letter!!

My husband died four years ago and I inherited his Serps. I paid full married woman’s National Insurance contributions for the 13 years that I worked full time.

Each year since 2017 when I was widowed, I have received the usual 2.5 per cent increase on the weekly amount I was initially given by the Department for Work and Pensions.

Now, suddenly I have only been awarded 1.6 per cent increase weekly. I have received no notification or explanation as to why this has happened.

All the figures on the statement appear to be the same, just the percentage of the national 2.5 per cent increase has been awarded to me.

I have returned the statement for correction but I am worried sick as to why my state pension has been reduced in this way.

I am 84 and live alone and only just now make ends meet. Are you able to shed any light on this strange situation, please?

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Steve Webb replies: I can understand why you are confused by what has happened. I hope that by explaining what is going on you will be less worried that a mistake has been made.

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As someone who reached state pension age before 6 April 2016, you come under the ‘old’ state pension system. Under this system, your weekly state pension is made up of a number of different elements.

These include:

– A ‘basic’ state pension, currently paid at a rate of up to £137.60 per week to those who have enough National Insurance contributions; for a widow, the contributions of a late spouse can be taken into account in working out your basic state pension;

– An ‘additional’ state pension (sometimes called SERPS – the state earnings related pension scheme) where the amount you get depends on how much you earned; this relates to employment from 1978-79 onwards; as you say, as well as your own additional pension you can inherit additional pension from your late husband;

– A ‘graduated retirement benefit’, which is a small earnings-related pension scheme which ran in the 1960s and early 1970s; again, you can also inherit some of this from your late husband;

What has caused you some confusion is that the rules around the annual increases in these different parts of your pension are different – they may not all go up by the same percentage amount.

Starting with the basic state pension, you may have heard of something called the ‘triple lock’.

Since 2010, successive governments have decided that in setting the basic state pension increase each year they will look at three things – the rate of inflation (the amount by which prices have gone up), the rate of earnings growth (what has happened to the wages of people in work) and a floor of 2.5 per cent.

Whichever of these gives the highest increase is then applied to the rate of the basic state pension.

In April 2021, the rate of basic state pension was increased by 2.5 per cent from £134.25 per week to £137.60.

This is because inflation and earnings growth were lower than 2.5 per cent and so the third element of the triple lock was applied.

However, the ‘triple lock’ policy does not apply to your additional state pension or your graduated pension.

These elements are generally increased only in line with inflation. Specifically, they use the increase in the Consumer Prices Index (CPI) in the year to last September.

As this was just 0.5 per cent, those elements of your pension go up by that amount. In previous years, CPI was higher so those elements would have gone up by more then.

The government would say that the reason inflation is so low is that prices were barely rising during the pandemic and therefore you don’t need much of an increase to maintain your standard of living.

If the main part of your pension rose by 2.5 per cent, but the other parts rose by 0.5 per cent, then your total amount would go up by something in-between – around 1.6 per cent in your case.

Incidentally, if you had been on the ‘new’ state pension, the process would have been slightly different.

The full amount up to the ‘flat rate’, currently £179.60, is covered by the triple lock policy, whilst any excess amount is uprated only by the CPI.

I do appreciate that this is not straightforward and the government could perhaps do more to explain why the different elements of your pension are going up by different amounts.

I should add that if you are finding it hard to make ends meet overall, you may want to look into claiming a top-up to your state pension in the form of pension credit.

You can find claim information here or by phoning 0800 99 1234. You could also contact your local authority about help with rent or council tax bills.