Tea Pension will be increased by 8.5 percent We provided a welcome increase in retirement income to millions of retirees in April.
September’s 6.7% inflation figure confirmed this if triple lock If maintained, the state pension would increase by the higher wage increase figure of 8.5%.
Covered by triple lock warranty state pension rising in line with wage growth (measured in the three months to July), inflation (September CPI reading) or 2.5%, whichever is higher.
An 8.5% increase means the full new state pension will rise from £203.85 to £221.20 a week, while the full basic state pension will rise from £156.20 to £169.50 a week .
This means £11,502 a year for those receiving the full new state pension, compared to the current £10,600.
However, despite this significant increase, the analysis of the platform Interactive Investor reveals state pension still not enough “Basic retirement income”.
As well as tips on what the shortfall is and how to close it, we also look at another pain in the tail of the skyrocketing state pension: tax.
What does “basic retirement income” mean?
Interactive Investor’s calculation of how much basic income a retiree needs is based on data from the Pension and Lifetime Savings Association retirement living standards. Earlier this year PLSA announced that the minimum annual income for a pensioner was £12,800. Interactive Investor increased this amount compared to September inflation This figure gives a value of £14,143.
According to PLSA, this minimum or basic income will cover all your needs in retirement, with some left over for entertainment and social activities. You can holiday in the UK, eat out once a month and take part in affordable leisure activities twice a week.
PLSA also has higher income levels, called “moderate” and “comfortable,” which allow for more luxuries in retirement, such as foreign holidays and theater trips.
What is deficiency?
There is clearly a huge difference in the amount needed to earn a basic pension income compared to the current state pension (£10,600 a year for someone on the full new state pension). The shortfall is £3,543.
As previously mentioned, the state pension is expected to increase by 8.5% next April, bringing the annual figure to £11,502 for pensioners receiving the full payment. But this is still not enough to secure a basic income of £14,143. Still £2,641 shorts.
“The government’s increase in pensions is great news for millions of retirees and will make it easier for them to pay their bills at a time when inflation is rising. But for the millions of pensioners who rely solely on the state pension, this increase will not even be enough to provide a basic standard of living in retirement,” says Alice Guy, director of pensions and savings at Interactive Investor.
He adds that because the higher “new state pension” was introduced only seven years ago, many older pensioners receive much less than the headline state pension figures. “Older pensioners who retired before April 2016 should receive just £8,816 next April, leaving their income well below the amount needed for basic income in retirement by £5,330.”
How can you increase your retirement income?
Increasing your pension contributions is a great way to increase your pension pot: you’ll likely get more tax relief from the government, plus your employer might pay a little more too.
An easy and hassle-free way to increase your pension contributions – without affecting your take-home pay – is to do so when you receive a pay rise.
You can also rollover unused funds. The annual pension allowance for most people is currently £60,000. So, if you haven’t exhausted your allowance in the last few years, this could be a way to pay into your pension, perhaps a bonus or a large lump sum from an inheritance, and still qualify for tax relief.
We have many more tips here: How to increase your retirement pot by over £100,000.
If you’re self-employed, it’s vital that you also put aside money for retirement, even if you won’t be able to benefit from an employer contributing to a pension on your behalf. You will still benefit from tax relief and compound interestThis means that today’s pension contributions could reach a tidy sum when you retire.
More than three-quarters (76%) of self-employed people do not pay a pension, according to a survey by Interactive Investor.
More retirees caught in tax net
State pension increases that reduce inflation have potential tax implications.
Personal allowance, which is the amount of income you can receive before paying tax, has been frozen at £12,570 since 2021/2022 and will remain so for the next few years.
Dean Butler, general manager of retail Standard Life, points out that in 2019/20 the full state pension payment filled 70% of the personal allowance. But next April the increased state pension will take up 92 per cent of the frozen allowance, leaving “pensioners with just a £1,070 gap before they start paying income tax”.
This means pensioners with very little extra income, for example from an annuity, pension deductions, a part-time job or a buy-to-let, could easily exceed the personal allowance and have to pay basic rate tax.
Those with sufficient other income may find themselves pushed into a higher tax bracket and have to pay a 40% tax on more of their money.