With the cost of living, or inflation, reaching 5.4% in December 2021, many people planning or already in retirement may be hoping that their pension income will stretch to meet everyday expenses.
There are certainly some welcome changes ahead as inflation bites, with increases to the State Pension and Pension Credit, for example, but unfortunately, these are unlikely to be sufficient to meet rising energy and food bills, which are some of the major costs in retirement.
Here, we look at what changes lie ahead for pensions over the next year, alongside other benefits you may be entitled to and potential ways to boost your pension.
State Pension rise
The State Pension will rise by 3.1% in April this year, and not by earnings growth, as the ‘triple lock guarantee’ has been suspended for 2022.
Usually, this guarantee means the State Pension will rise by the highest of September’s inflation figure, earnings growth, or 2.5%. However, with earnings growth at 8.3%, this would have meant the cost of this uplift would have amounted to an eye-watering £3 billion. Find out more in our article What is the pension triple lock?
With government finances already under pressure in the wake of the pandemic, ministers claim it would have been difficult to justify such a sharp increase.
The full State Pension will therefore increase in line with September’s 3.1% inflation figure instead, which means it will go up by about £5.50 a week to £185.20, or a total of £9,630 a year from April 2022. The basic State Pension will rise from £137.60 to £141.80 a week, or a total of £7,374 a year. Read more in our article How the State Pension works.
This means that those relying on State Pension for their retirement income are likely to face significant financial strain. Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “Inflation is at its highest for a generation; now all generations face a struggle to cope with rising prices.”
“A large proportion of low income households are pensioners. Age UK has estimated there are more than two million pensioners living in poverty in the UK.”
“Those receiving the state pension will receive a 3.1% uplift in April, which is dwarfed by the current level of inflation. The imbalance between state pension rises and inflation rates, which are likely to rise further by April, will provoke further calls for the Government to consider a more generous uprating that properly reflects the difficulty many older people now face.”
Pension Credit rise
Up to a million pensioners are failing to claim Pension Credit, which could provide a valuable income boost of as much as £3,000 a year. It’s vital that you claim this money if you’re eligible, as it could make a real difference if you’re struggling financiallly, and it could help you to qualify for other benefits too (see below).
Pension Credit is a means-tested benefit and can increase retirement income by up to £177.10 a week if you’re a single person, or £270.30 for couples, and may be higher in some situations, such as if you’re a carer for someone. Read more in our article Pension Credit explained.
The amount you can claim will rise by 3.1% from April 2022 to £182.59 for single people, and £278.69 for couples. This increase is based on the Consumer Price Index (CPI) rate of inflation from September 2021, which is significantly lower than the December inflation rate of 5.4%, leaving a large disparity between what people will receive in Pension Credit and their actual living costs.
You can find out if you’re eligible for Pension Credit and how much you can get using the Gov.uk Pension Credit calculator.
Flat fee ban on very small pension savings
The charging of flat fees on workplace pensions worth less than £100 will be banned from April 2022. Currently, pensions with low values have in some cases been reduced to nothing by administration costs and charges over the years.
Yet even with the ban on flat fees, a small pot may still slump in value over the years, depending on other charges and the value of underlying investments.
Rebecca O’Connor, head of pensions and savings at Interactive Investor, said: “Anyone worried about small pension pots being eroded by charges who has a number of them from old jobs could consider bringing them together in one place.”
“This also has the advantage of making it less likely that you will forget about old, low-value pensions from the past and therefore less likely that any will be eroded to such low levels.”
The average person has 11 jobs in their lifetime, according to the Department for Work and Pensions (DWP), and may save into multiple workplace pensions, with some worth particularly small amounts. If you have several pensions and are considering moving them into one plan, you can find out more in our article Should I consolidate my pensions?
If you think you’ve lost track of any pensions you might have, there is a section of the government’s Gov.uk website which may help you find contact details for a pension scheme, if you cannot find these. Our article Tracing lost pensions also has plenty of tips on how to find missing pensions.
Many pension allowances have been frozen for several more years, which could see a growing number of people paying more tax over time.
Lifetime Allowance: This is the maximum you can save in your pension over your lifetime, without paying any extra tax charges when you withdraw money from your pot. For the 2021/22 tax year, this allowance stands at £1,073,100, and it will remain at this level until the 2025/26 tax year. Read more in our article How do pension allowances work?
While this limit won’t apply to the majority of pension savers, it may affect some with large pots, or who have saved into defined benefit (DB) pension schemes. They may be unaware that their pension is valued at twenty times their annual pension for Lifetime Allowance purposes, and so an annual pension of £30,000 has a value of £600,000 for the purpose of testing it against the Lifetime Allowance, for example. Any tax-free cash received from the pension will also need to be added to this figure and tested against their available LTA.
Jonathan Watts-Lay, director at financial wellbeing and retirement specialist WEALTH at work, said: “Whilst having over £1m in pension savings may seem unrealistic to most, reaching the Lifetime Allowance could be closer than many think. And it’s not just high earners and those with defined benefit schemes that will be affected, but those who have saved from an early age, and whose investments have performed well.”
If you are in receipt of certain pension benefits you may be entitled to additional money in 2022 to help meet the cost of energy bills, for example, and other outgoings.
Cold weather payments: If you are receiving low-income benefits such as Pension Credit you should be entitled to automatic payments of £25 when your local temperature sits at an average of zero degrees celsius or below for at least seven consecutive days between 1 November and 31 March each year.
Warm homes discount: You may be able to get £140 off your electricity bill for 2021/22 under this scheme as a one-off bill reduction, which is paid directly to your energy provider if you receive certain means-tested benefits such as the Guarantee Credit element of Pension Credit. Find out more about what help is available towards energy bills in our article Are you eligible for help with heating costs?
Free TV licence: If you are a pensioner aged 74 or over and claiming Pension Credit you are entitled to receive a free TV licence, and a refund for any payments made while not being aware you were eligible, if that is the case.
Where to go for more help
It’s more important than ever to explore all the different ways you might be able to increase your retirement income. You can seek free guidance from the age of 50 and above from the Government’s Pension Wise service on your pension choices at retirement. You can call them on 0800 138 3944 to book a free appointment or book one through their website.
However, if you want more tailored advice specific to your situation to maximise your potential income, you can find a local financial advisor on VouchedFor or Unbiased. For more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you think you might be interested in speaking with a pensions expert, Rest Less Financial Services is now offering our members a free Pension Health Check with a Rest Less Pensions Expert.
If you’re lucky enough to have a defined benefit or final salary scheme, you’ll get a guaranteed income at retirement which can make it much easier to plan your budget. Check with your scheme’s administrator if you’re not sure when this income will start being paid. Find out more in our article Your options at retirement.
What do you think about pension changes that are happening in 2022? And are you claiming any additional benefits? We’d be interested to hear from you. You can join the money conversation on the Rest Less community or leave a comment below.