State pension changes explained by investment advisor
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The state pension will increase by 3.1 percent this year it has been confirmed by the Government. This is likely to be welcome news for older people amid the cost of living crisis, although the rate of inflation to February 2022 was 6.2 percent.
Many will be keen to understand how this percentage increase directly impacts the amount they receive.
The state pension is currently split into two tiers – the old ‘basic’ state pension and the new state pension.
What type of state pension a person receives will depend on when they were born, and their retirement.
The basic state pension is for men born before April 6, 1951 and women born before April 6, 1953.
The new state pension can be claimed by men born on or after April 6, 1951 and women born on or after April 6, 1953.
The earliest point at which people can get the state pension is at state pension age – currently 66.
The amount a person gets through the state pension is also predicated on the National Insurance contributions they have built up during their lives.
For the basic state pension, a person will typically require a total of 30 qualifying years of National Insurance contributions or credits.
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Having less than this means the basic state pension will be less than the full sum.
To get any new state pension, individuals usually need 10 qualifying years on their record.
Some 35 qualifying years are needed to get the new full state pension, if a person does not have a National Insurance record before April 6, 2016.
Certain people may get less than the new full state pension if they were contracted out before April 6, 2016.
But what does the 3.1 percent increase confirmed by the Government actually mean for pensioners this month?
Firstly, it is important to note the new rates of the state pension will come into effect on April 11, 2022 – leaving Britons with a few days on the current rate.
The full basic state pension is currently £137.60 per week, but this will increase to £141.85 weekly.
The newer sum will also increase from its full present level of £179.60 weekly to £185.15 per week.
However, the pension is not increasing by as much as many older people originally thought it might.
It was hoped the sum would rise by eight percent due to the triple lock, however, the measure was temporarily scrapped due to perceived lack of affordability.
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Warped earnings data due to furlough and the pandemic through the triple lock mechanism out of kilter – and it was abandoned for one year only.
But with the Bank of England predicting inflation may reach eight percent in Spring, and even higher later in the year, a substantial increase could be on the way for pensioners in 2023/24.
Steven Cameron, Pensions Director at Aegon, said: “The calculation of the increase from April 2023 will use inflation till September 2022, which could be near its peak of eight percent or above. The triple lock will pay this, or even more if earnings growth is higher again.
“Without the Government doing any further tinkering, this could put state pensioners on target for a bumper eight percent plus increase in 2023, potentially the highest increase ever, compensating for the relatively low increase this April.
“While not helping to alleviate this year’s pressures, it will at least offer a more generous increase in the future. And, any significant increase in the state pension will boost the income of current state pensioners and future generations.”
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