This week’s rise in state pensions was heralded as one of the biggest ever. But Money Mail can reveal that less than a third of pensioners received benefits the full 8.5 percent increase on their entire income.
Two in three – as many as eight million retirees – received a smaller one are increasing their payouts this year. This is due to little-known rules that penalize older pensioners the most and have been branded ‘unfair’ by a former Pensions Minister.
In the worst cases, pensioners are left short by more than £213 a year.
The triple lock, which ensures the state pension rises every year, has long been championed as a core principle in the Tory party’s manifesto and one that the government has proudly said will protect the incomes of all pensioners.
Older pensioners will be let down the most this year, warns former Pensions Minister Baroness Ros Altmann
The promise guarantees that the core part of the state pension will rise by the highest rate of inflation, wage growth or 2.5 percent every April.
This year, the triple lock ensured that the state pension rose at the rate of wage growth, namely 8.5 percent. This is the second largest increase since the mechanism was introduced in 2010.
The huge increase was expected to provide a much-needed boost to retired households after a period of high inflation.
But old rules mean that parts of the state pension payment received mainly by older pensioners are not tied to the triple lock and instead rise every year due to inflation.
This year’s inflation rate – 6.7 percent – is lower than the triple lock increase of 8.5 percent. This means that more than eight of the twelve million retirees have a shortfall in part of their state pension.
Chancellor Jeremy Hunt handed workers a 2p cut on national insurance for the second time in six months at his spring budget in March
Older pensioners will be let down the most this year, warns former pensions minister Baroness Ros Altmann. This is because they are most likely to receive parts of the state pension that are not covered by the triple lock.
She says a lot of people will be confused by this week’s increase.
“The triple lock is a political ploy designed to be a shorthand for politicians to say we will look after the pensioners, and the government can get away with it because it is complicated and outdated,” she says. “It’s giving the biggest increases to the youngest retirees, and that’s the wrong direction.
“It is long overdue that we look at how we protect retirees, especially the oldest, who tend to be poorer and need it most.”
Denying the full increase to pensioners will save the government more than £350 million, an analysis of official data has found.
Here, Money Mail explains how to find out if you’re affected.
What does the triple lock promise?
The triple lock applies to the core part of the AOW pension, which is based on the number of years of national insurance contributions you have paid.
It has been in place for more than a decade and the Conservative government has pledged to enforce the rules if it wins the next general election. Labor has hinted it is likely to adopt the same policy.
On Monday, the triple lock meant the new state pension – paid to those who reached retirement age after 2016 – rose by £902.20 a year to £11,502.40, or £221.20 a week.
It also increased the basic pension – paid to those who reached retirement age before 2016 – from £156.20 to £169.50. This amounts to €8,814 per year.
Which parts of the state pension were excluded?
The old state pension, which is paid to those who reached retirement age before 2016, consisted of two parts. The first is the basic state pension, which anyone who has paid NI contributions for 30 years would receive. The second is called ‘supplementary AOW’, which takes into account your income and whether you have been entitled to benefits.
The triple lock only applies to the basic state pension, but not to the supplementary state pension element.
Most retirees who retired before 2016 on the old AOW have built up a right to this additional income-related part of the AOW. It is this part of the payment that will only increase due to inflation.
This means they will rise by 6.7 percent, September’s annual inflation rate, and not 8.5 percent.
For many years, this additional element was called ‘Serps’ (state income-related pension scheme). This later became the State Second Pension (S2P).
For some, Serps represent more than half of their state pension. Some receive as much as the full basic pension of £169.50 per week, plus a maximum Serps pension of £185.90.
Of the 7.6 million pensioners receiving Serps, the average person gets £2,542.25 a year – or £48.90 a week, according to analysis of official figures.
Anyone who receives the graduated pension benefit, an earlier version of the income-related supplement to the state pension that existed between 1961 and 1975, will also only receive an inflation-related increase in this part of their income.
The maximum additional AOW pension you can receive in the 2023/24 tax year is €204.68 per week. This also applies to any rights you have to both Serps and S2P, and any additional state pension you may inherit.
Someone who received the maximum additional state pension last year would be £213.25 a year better off if their entire state pension rose below the triple lock rate of 8.5 per cent this year.
Will anyone be affected by the new state pension?
Pensioners who receive an extended state pension because they have postponed taking it will also suffer. This applies regardless of whether you have been granted a postponement of the old or new AOW.
You can postpone your AOW benefit for at least nine weeks and receive more money when it starts. Under the system in place since 2016, your weekly allowance increases by 1 percent for every nine weeks you defer, which equates to 5.8 percent for every year you defer.
Because deferred payments rise with inflation rather than the triple lock, pensioners would lose out on an extra £11 this year for every year they delay.
When the new state pension was introduced, there were retirees who would have been better off under the old system. This is because they would have benefited from people like Serps.
To ensure that they would not lose out under the new system, ‘protected payments’ were introduced. They supplement the new AOW to the position they would have been in under the old AOW.
However, these protected payments are also not protected by the triple lock, according to Steve Webb, also former Pensions Minister.
This is the first time in three years that the peculiarity of the rules has resulted in pensioners being shortchanged. Over the past two years, the state pension has increased due to inflation and therefore all elements have increased together.
money-ccox">‘I am furious that my pension is not fully increasing’
David Salisbury, from Northampton, was surprised and confused to see his pension would rise less than the generally advertised rate when he received a statement about the increase a few weeks ago.
Instead of increasing by the full 8.5 percent, his pension will grow by 8.18 percent, he says.
This is because the 69-year-old who receives the new state pension also receives a ‘protected benefit’ on top of that. This part will increase by only 6.7 percent, instead of the full 8.5 percent.
If his entire pension had been increased by the full amount, he would be £40 a year better off.
He says, ‘I’m not losing out on a fortune, but it’s the principle of it, and compound interest means I’m going to get poorer and poorer as the years go by.
‘Politicians have been very misleading and are letting us down by being so careful about the money.
‘It is unfair that our full state pensions are not increasing by the amount they proudly talk about. Politicians are not direct and honest with people.’
Retirees are left behind
It’s a double whammy for retirees like David, who were left behind during the government’s recent tax cuts. Chancellor Jeremy Hunt handed workers a 2p cut on national insurance for the second time in six months during his spring budget in March. However, the tax cuts, which are collectively worth £900 to the average worker, will not help pensioners as they do not pay national insurance.
Baroness Altmann says: ‘Pensioners may feel that things are stacked against them rather than for them at the moment.’
Many retirees are also facing an increasing tax burden. More than half a million retirees will be hit with income tax bills for the first time since retirement after the state pension rose on Monday. And up to 1.6 million extra pensioners will pay income tax over the next four years as a result of the government’s secret tax heist, according to predictions from the House of Commons Library.
j.beard@dailymail.co.uk
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