State pension to rise by 2.5% in 2021

The often controversial triple-lock which allows the state pension to rise each year may be under threat as the Treasury seeks to reign in its spending.

 State pension set to rise

Pensioners will welcome an above inflation increase. on the State pension

The state pension is to rise by 2.5% from April 2021 – provided the Government maintains the triple-lock promise, which means that the state pension will rise every year by the highest of either the consumer price index (CPI), average earnings or 2.5%.

The adjustment comes about as the Office for National Statistics (ONS) has just published September’s annual CPI 12-month rate inflation figure, which stands at 0.5%.

Pensioners on the new state pension will see a rise of £4.40 a week to £179.60 and those on the old state pension will see a rise of £3.40 a week to £137.65.

There are concerns however that the measure to maintain the purchasing power of the state pension could itself be difficult to maintain financially. The annual adjustment costs the Government a lot of money and in light of the huge borrowing that the Government has had to take on to assist individuals and businesses through the covid-19 pandemic, the Treasury is looking for areas to cut costs.

The arguments for and against the triple-lock were covered here on What Investment earlier in the year.

Becky O’Connor, head of pensions and savings for investment platform, interactive investor, said: “The security of the 2.5% measure within the state triple lock is showing its worth and will help protect the income of millions of pensions from next year.

“But the fact that it has kicked in could mean there is a risk the Treasury decides to tinker with this valuable protection. Millions of people rely on the state pension to cover their living costs and it’s already arguably not generous enough.”

Certainly those relying on the state pension or appreciative of it when income from other means are low, will welcome the increase however. It does, after all amount to between £176.80 and £228 per annum extra.

Kay Ingram, director of public policy at financial planner, LEBC said: “Pensioners will welcome this above inflation increase. It will to some extent offset the very low interest they are receiving on cash savings following reductions in interest rates offered by many banks and NS&I.

“The short-term impact of rolling lockdowns on both inflation and earnings is likely to mean that both these measures could be very volatile and should either CPI or national average earnings rise dramatically, if and when lockdown eases, pensioners could benefit again. In such circumstances the Government may consider smoothing the data used as a reference point over a longer period.”

Another impact on pensions comes from the inflation-linked hike in the Pensions Lifetime Allowance – which is likely to rise by approximately £5,800 to £1,078,900 (currently £1,073,100) from the new tax year 2021/22, depending on the actual formula applied by HMRC.

Paul Avis, strategic proposition director at Canada Life said: “Today’s release from ONS and the subsequent uprating of the Lifetime Allowance (LTA) should serve as a reminder for employers of potential unexpected repercussions for holders of registered group life insurance. Many employers and employees are unaware that benefits from this type of insurance policy is also counted under the pensions lifetime allowance. As a result, beneficiaries of death benefits can find themselves surprised with a 55% tax bill for any amount they receive over the LTA threshold.

“Whilst it is true that the LTA level increases every year this does not necessarily mean less people are affected. Annual salaries also increase, often beyond inflation, alongside a growth in pension fund value. To avoid this problem a number of employers have been adopting Excepted Group Life Trusts instead which are not counted under the allowance.

“This unintended consequence demonstrates how critical it is that employers and Pension Trustees regularly review the impact of the LTA on death benefits and understand how their policy holders would be treated.”

Meanwhile Frances O’Grady, general secretary of the TUC General Secretary has called for other benefits to reflect the impact of the actuality of living costs for those without employed income.  She said: “This month’s inflation figure is particularly important, as it would normally be used to set cost of living increases for basic support like Universal Credit. But these aren’t normal times.  It should be clear to the Chancellor that a rise of 0.5% will not be enough to get families through the tough year ahead.

“That’s why we’re calling for an increase in the basic amount of Universal credit to £260 a week. And the Chancellor should not wait until April. He should bring in the rise early as families need that support now.”

Further reading: Pension threat from Covid-19 and five top tips to recover

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