Why your State Pension could get a huge boost in 2023

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It’s likely that when you retire, your pension savings will form the bulk of your income. And while it may not be enough for you to live the lifestyle you want, your State Pension will play an important role in providing a guaranteed, inflation-linked income.

With that in mind, a recent announcement from the chief secretary to the Treasury, Simon Clarke, will come as very welcome news.

Mr Clarke has confirmed that the “triple lock” will apply when calculating next year’s State Pension. But what does that mean, and how might it affect you?

Read on to learn about the proposed State Pension increase, plus two things you could do to make the most of it.

Your State Pension, explained

When you reach State Pension Age – currently 66 but set to rise to 67 by 2028 – the government provides your State Pension, a regular payment to support you after you’ve stopped working. As of April 2022, the full new State Pension amount is £185.15 a week.

At the moment, the State Pension is available to men born on or after 6 April 1951, and women born on or after 6 April 1953.

The triple lock ensures your State Pension rises every year

State Pension increases are based on one of three figures, a rule known as the “triple lock”. Each year’s increase is calculated against whichever is highest from the following:

  • Average earnings
  • Inflation, based on the Consumer Price Index (CPI)
  • 2.5%

The triple lock policy was suspended in 2021 because the State Pension would have increased by average wage growth, which was 8.8% as the country reopened after Covid-19 lockdowns. Instead, a “double lock” meant the State Pension rose by 3.1%, the CPI rate.

Now, though, MP Simon Clarke has confirmed that the triple lock will apply to this year’s State Pension raise, which could be very good news for retirees.

When rising inflation can be a positive

According to the Office for National Statistics, UK inflation hit 9.4% in June 2022, a 40-year high. While you may have seen the effect of high inflation on the cost of your fuel, food or energy, there’s an upside for pensioners.

Remember that, under the triple lock system, State Pension increases are based on the highest of inflation, average earnings, or 2.5%.

If the State Pension increase was calculated right now, it would grow by 9.4%, in line with inflation, which is the highest of the three figures. And, there’s another point to consider.

Simon Clarke said next year’s State Pension increase will, as previously, be based on the CPI inflation rate for September 2022. Inflation will probably continue rising over the next few months, and is likely to be even higher than the 9.4% it hit in June. That means the State Pension percentage increase is likely to be significant, possibly even double figures.

For example, a 10% increase to the State Pension would see an annual boost of more than £950 for those receiving the full amount.

2 ways to boost your State Pension

The triple lock is designed to ensure that your State Pension keeps pace with the rising cost of living. It’s a useful part of your retirement fund, providing a guaranteed income that increases each year.

If you want to make sure you get the most from your State Pension, there are two ways that you could potentially boost it.

  1. Defer it

You may not know that when you reach State Pension Age, you have to claim your State Pension rather than receiving it automatically.

Most people choose to claim it as soon as they can. But the other option is to defer this claim, and there’s a possible reward for doing so.

If you reach State Pension Age on or after 6 April 2016 and defer your claim, your payments will increase by the equivalent of 1% for every nine weeks you defer. This works out at just under 5.8% a year.

So for the current State Pension rate of £185.15, if you defer for a year you’ll receive an extra £10.70 a week.

  1. Check you’ve made enough National Insurance contributions, and “buy” more if not

To qualify for the full State Pension, you need 35 qualifying years on your National Insurance record. However long your career has been, don’t take it for granted that you qualify.

If you lived abroad at any point, there could be gaps in your National Insurance record. There might also be gaps if you ran your own business, depending on how you filed your self-assessment tax returns. There’s a way you can fix this, though.

You may be able to “buy” more years on your record by paying voluntary National Insurance contributions.

We can help you to work out whether “buying” a larger State Pension would be worthwhile based on your individual circumstances.

Get in touch

If you’d like to discuss creating a retirement income strategy that works for you – including your State Pension – please get in touch. Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.