Written by Tom Selby, head of retirement policy at AJ Bell
The uprating of benefits, including the state pension, has found itself at the centre of a political storm in recent weeks.
Both the Chancellor and the Prime Minister have confirmed the state pension triple-lock will be honoured, with retirees set for a bumper increase in their incomes in April 2023 as a result. With cabinet ministers now openly questioning whether benefits for those in work should be increased in line with inflation, an all-out civil war has broken out over the topic at the Conservative Party conference.
If CPI inflation comes in at 10% in September, the ‘new’ state pension should rise to £203.65 per week – well over £10,000 a year – while the basic state pension should increase to £156.05 per week.
The state pension has a long and complicated history, however, with various different elements that aren’t protected by the triple-lock guarantee.
This includes the additional state pension, a state pension top-up paid to people based on their earnings where they reached state pension age prior to April 2016, the ‘protected payment’ element of the new state pension, and pension credit.
Could the poorest be hit?
The good news for those in receipt of a state pension ‘protected payment’ or with additional state pension entitlements is the legislation requires the Government to uprate these benefits in line with inflation. Given inflation in September is pretty much nailed-on to be above earnings or 2.5%, they should see all their state benefits rise in line with prices.
However, what happens to over 1.4 million people in receipt of pension credit – among the poorest retirees in society – is less clear.
Legislation only requires the Government to uprate the core element of pension credit – the ‘standard minimum guarantee’ – in line with average earnings growth. Based on average earnings growth in the three months to July, this implies guarantee credit will rise by 5.5%.
Other elements of pension credit, including savings credit and extra top-ups for carers and those with severe disabilities, have no increase baked in.
What could happen to pension credit?
This does not mean that there cannot be an increase – or an increase higher than earnings in the case of the standard minimum guarantee – but it does mean it is at the discretion of the Government.
For the increase applied this year, for example, temporary legislation created as part of the decision to axe the earnings element of the triple-lock for one year saw all elements of pension credit increase by 3.1%, in line with the September 2021 CPI inflation figure. This legislation falls away for next year’s increase.
Given pension credit is paid to the UK’s lowest income retirees, it would cause uproar if they did not receive the same protection against inflation as those in receipt of the state pension. The uncertainty around this is undoubtedly causing anxiety to lots of people, particularly on the back of recent energy price rises.
The Government has the power to ease the worries of millions of people by setting out exactly what increases will be applied next year.
Pension credit explained
Pension credit is paid to those on low incomes who have reached state pension age. It is made up of two elements – ‘guarantee credit’ and ‘savings credit’.
Guarantee credit provides financial help for people who have reached the ‘qualifying age’ and whose income is below a specified amount. This comprises a ‘standard minimum guarantee’ amount and additional top-ups in respect of severe disability, caring responsibilities and certain housing costs, such as mortgage interest payments.
In 2022/23, the standard minimum guarantee amount is set at £182.60 per week for a single person and £278.70 per week for a couple. Those with incomes below these levels will have them topped up to this amount by pension credit.
The savings credit element of pension credit was removed from 6 April 2016, but those entitled to it before this date can continue to receive it.
You could be entitled to savings credit if:
- You reached state pension age before 6 April 2016
- You saved some money for retirement within an occupational or personal pension
You’ll receive up to £14.48 savings credit a week if you’re single, while if you have a partner you’ll get up to £16.20 a week.
Currently, over 1.4 million pensioners in Britain receive pension credit. However, the DWP is concerned there are still many people who are entitled to claim but do not. It estimates there are 850,000 eligible households not claiming pensions credit.
