State Pension to jump by £40 a week

Investing and pensions

John Fitzsimons
20 March 2011 | 51 Comments

Good news for pensioners as Government pledges to raise State Pension.

It’s not often that we get to use the words ‘pensions’ and ‘good news’ in the same breath, but for once there is a definite ray of hope for those people nearing the end of their working life.

The Government wants to revamp the State Pension, a move long overdue. And it is likely to result in pensioners receiving an extra £40 a week!

We don’t know what we are getting!

First, it’s probably a good idea to review exactly how State Pension works currently, given the shocking number of people who have no idea what they can expect from the State.

A survey by Prudential last month found that a quarter of people planning to retire this year significantly overstated how much the State Pension is worth, believing it to stand at £110 a week. Terrifyingly, 7% of respondents did not have the first idea how much it was worth!

This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.

Given that 20% of this year’s retirees (28% of women and 10% of men) plan to rely entirely on the State Pension to fund their twilight years, it’s scary how little many of us know about what to expect. Perhaps it’s an ostrich situation – we don’t want to think about getting old and retiring, so put off all thoughts of it to the very last moment. This is clearly not a good idea.

The State Pension, as it stands

Currently, the State Pension is worth £97.65 a week for a single or married person who qualifies via their own National Insurance contributions for the 2010/11 tax year. There is a couple’s State Pension, for those couples where one person has not paid enough National Insurance to qualify for the State Pension in their own right, which stands at an additional £58.50 a week.

From this April, there is a ‘triple guarantee’ that the State Pension will rise by the highest of the following:

The average percentage increase in wages that year
The percentage that the cost of living increases by that year
2.5%

The additional State Pension

However, there is also the additional State Pension to take into consideration. This is money from the Government on top of your usual State Pension, and has gone under all sorts of different names in the past, most notably the State Earnings-Related Pension Scheme.

Unlike the State Pension, which is a flat figure, the additional State Pension you receive can vary according to a number of different factors. It’s an added layer of complexity that really doesn’t do anyone any favours.

The Universal State Pension

Iain Duncan Smith, the Secretary of State for Work and Pensions, wants to ditch the complexity and instead introduce a single, flat State Pension that is more generous. A Universal State Pension, essentially.

A £200,000 personal pension

And while £140 a week may not sound like a king’s ransom, in pension terms it’s a really significant figure.

According to MetLife, a pension of £140 a week is the equivalent of a private pension fund of up to a whopping £217,000!

If a 65-year old retiree wants to protect their income against inflation, a man would need £195,000, while a female would need a pot of £217,000 currently. However, if they were willing to take their chances with inflation, the fund size would only need to be £122,000 for men and £131,000 for women, still a healthy pot size but not quite so large.

Related how-to guide

Start a pension

We all need to consider how we’re going to pay for our lifestyle in retirement. Follow these simple tips for how to get started.

See the guide

Given that the average pension pot at retirement is currently just £25,000, as we discuss in Five crucial pension facts, the State Pension starts to look an awful lot more generous.

Playing the waiting game

Inevitably, it will take a while before any of this actually happens. It’s likely that there will be a mention of the pension plans in next week’s Budget, with a Green Paper published later this year. However, the reforms are unlikely to actually be in place until 2016.

This is a shame, but it’s worth waiting to ensure that they get the reforms right in practice.

Relying on the State

However, it’s always a good idea to not rely entirely on the State to sort out your pension for you. Be sure to have a read of How to fall in love with your pension again! to remind yourself as to why a pension is so important. And if you fancy taking control of your pension, rather than leaving it to the pension firms, check out How to put together your SIPP.

More: Get a 0% credit card | Five crucial pension facts | Renters rise by one million people!

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Comments

jennysue19
18 September 2012
I currently receive State Pension, second state pension and Pension credits which total over £200 a week including help with housing costs and discounted council tax. I worked for that second pension money in the same way as if I had put it into a private scheme and reducing it to a flat rate of £140 would be completely unfair and devastating to my future security and standard of living. I'm planning on selling my house anyway and will have to give a proportion of the equity to an ex partner (an outrage since he has not contributed to the mortgage for over 6 years) and may not have enough to buy a smaller property outright, condemning me to rent for the rest of my life. I cannot imagine that this legislation could possibly succeed for those already in receipt of second pensions. It is just one more attack on the old, the disabled and the sick for which this Government has become famous. I trusted the Liberal part of the Coalition to tone down the excesses of a Conservative party intent on destroying state welfare benefits and penalizing people who cannot work through no fault of their own. I am very disappointed in Nick Clegg and his party's Cabinet members.
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triciakat
21 September 2011
question . the proposed universal pension.. will it apply to all pensioners ? i am due to retire havng paid full contribtions before the proposed increase . Will i receive the increase as an existing pensioner or will there be a 2 tier system?
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Vicc
18 September 2011
Too many people on these threads talk about working hard and saving for your retirement which is perfectly justifiable if you are in a job that pays you enough to actually save! For a vast number of people, it is a matter of managing to pay the bills, keep the car going so they can use it for work (not everywhere has even half-way decent public transport), ensure the children understand that they can't have everything: but children grow and need new shoes all too frequently - clothes can be 2nd hand but second hand shoes are not good for growing feet - oh and they eat. And for all those who reckon we shouldn't have children: where is the next generation of workers going to come from? Overseas? That should please those who are rabidly agin immigration but also, more seriously, deprives other countries of those workers' skills. Whilst a number of families may "mismanage" their money in the eyes of the sanctimonious, far from everyone does. We have been in the "have it all, have it now" culture since the late 1980s at the very least and cheap credit has been pushed at us for well over 25 years. It's hard not to take advantage of that if you need furniture to move into unfurnished housing from furnished; to buy clothes so you can look decent for job interviews and so on. And despite many more people owning their own homes, many older (and younger!) people do not, never having had the income to do this or, perhaps, the wish to do this. The politics of envy is certainly demonstrated on these threads. All these uncharitable thoughts are not worthy of you all. Stop, think again and realise that not everyone is able to do what you have done. Circumstances change.
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