State pension hits £11,500 tomorrow – yet millions face £2,700 shortfall | Personal Finance | Finance
This will lift the new state pension to £11,501 for those who get the maximum amount, but millions get thousands of pounds less and will feel hard done by as a result. Why are they losing out?
One reason is that there are two state pensions. Anyone who retired from April 6, 2016, will qualify for the single-tier new state pension, while those who retired before then get the basic state pension.
Under the triple lock, both increase each year either by earnings, inflation or 2.5 percent, whichever is highest.
The problem is that the basic state pension starts from a lower point. So each year’s increase is worth relatively less, and the gap widens every year.
From Monday, the new state pension will increase by £901 to a maximum of £11,501, while the basic state pension rises just £690 to around £8,813 a year.
That is a staggering £2,688 less.
The gap between the two pensions has widened by £211 in just one year and will continue to grow every year after that, said Stephen Lowe, director at the retirement specialist Just Group. “People see the headline figures and feel that it is unfair that retiring just one day before April 6, 2016, could mean receiving £50 a week less than someone born afterwards.”
However, the picture is more complicated.
How much you get in practice partly depends on how many years of qualifying National Insurance (NI) contributions you made during your working lifetime.
To get the full new state pension, both men and women need 35 years of NI. For the basic state pension, men originally needed 44 years of NI, and women needed 39 years. This was reduced to 30 years for both from 2010.
This makes direct comparisons tricky. But an even more important factor is at play.
Many on the basic state pension get their income topped up by additional state pension, either the state earnings-related pension scheme (Serps) or state second pension (S2P).
These are based on earnings so men have typically built up a lot more and do relatively better from the basic state pension, said Andrew Tully, technical services director at Nucleus Financial.
DWP figures show that in February last year the average male basic state pensioner got £9,291 a year, marginally above the £9,128 they got from the new state pension.
However, women on the basic state pension averaged a meagre £7,951 a year, because they have much less additional state pension. Women do better on the new state pension getting £8,872.
Tully said the new state pension has narrowed the pensions gender gap, as planned. “Women now get much closer to the amount men receive.”
That doesn’t help older women, though.
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Many struggle on a single basic state pension after the death of their partner or divorce.
Among single pensioners, some 580,000 women live on the state pension alone, compared to just 180,000 men.
Pensioners on low incomes may be able to claim pension credit, which guarantees a minimum income of £11,343.80 a year for singles, and £17,313 for couples. Yet 850,000 of the poorest fail to claim.
Having two different state pensions inevitably produces winners and losers. The biggest losers are single women – and a smaller number of men – living on the basic state pension with no Serps, S2P or company and personal pensions.
The DWP says that under the new state pension, men and women should get similar amounts by the early 2040s, more than a decade earlier than under the old system. But that’s a long way off and many are struggling today.
The grim underlying truth is that neither pension pays enough to provide a comfortable retirement, even with the triple lock.
