State Pension to jump by £40 a week

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!

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.

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He believes that the complexity of the current system means that many people have little idea what they can expect to receive in retirement. Prudential’s research would suggest he is right.

So he wants to ditch the additional State Pension element, and instead see the normal State Pension increased to around £140 a week. This is actually the figure that the National Association of Pension Funds has been campaigning for, for some time, as part of its ‘Foundation Pension’ proposals.

The Government believes that currently the pension world is sending the wrong message when it comes to saving for retirement, as those who do save find those savings clawed back as a result of means-testing. By moving to a flat rate, this would no longer be the case.

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.

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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.

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