Pention link to earnings?

zarazara

I hear in the Budget that Pensions are to be linked to earnings in the future. What does this mean please?Will someone currently earning £20,000 receive a state pension of £20,000 or will pensions all receive average earnings equivalent ? or does it mean something else?
Thankyou in advance.

mjm3346

Does not change the pension, it is the % amount the pension increases each year that will be linked to the % increase in average earnings (if that gives the biggest increase of the three things considered).

Jennifer_Jane

zarazara - I think you should get a pension forecast, as it seems as if you don't understand how it works (I don't mean this unkindly but rather to protect yourself). Rather do that now, even if you're not retiring for a long time.

http://www.direct.gov.uk/en/diol1/doitonline/dg_4017970

And mjm3346 is exactly right, the budget is guaranteeing an annual increase based on the average earnings increase; or price index inflation, or 2.5%. This is a little better than (I had) expected.

What we don't know, though, is whether this will be on the whole State Pension or just the Basic State Pension (ie not the deferred pension and other odd bits and pieces that help make up the amount: another lie by Brown/Darling).

Jen

zarazara

Thankyou. That explains it! re my own pension, I will receive the basic state pension only and my husband will receive the basic state plus about £7 extra per week. We should be able to manage [I hope!].

hansi

It appears that the rises will apply to the Second State Pension too from April. About time!

margaretclare

hansi wrote: »

It appears that the rises will apply to the Second State Pension too from April. About time!

Oh good. DH and I will be a bit better off then. We both get SERPS (now S2P) although he gets a lot more than I do (was never opted-out into employment pension).

Am still worried about family members who'll be adversely-affected, though.

hugheskevi

It appears that the rises will apply to the Second State Pension too from April. About time!

Do you have a reference to confirm this?

It is not my understanding at all, I think all additional pension in payment will be uprated in line with CPI.

Jennifer_Jane

Yes, I would like a reference too, please, as my personal quibble is the lies we were told about deferring the pension and thus losing out on (for me ) two years' capital that I could have had. With inflation if these extra amounts (including the Additional State Pension, guaranteed etc) they will reduce in value to be worthless in time.

We should be better off with the guarantee of the highest of earnings/prices/2.5%, but it would be heartening to hear that the whole Basic State Pension would be increased by whatever percentage every year.

hugheskevi

I've quoted the relevant passages of the Budget document below.

I've added italics and bolding to the section which show that Second State Pension will be changed to CPI uprating.

Jennifer_Jane - your total State Pension is made up of Basic State Pension and Additional Pension. When you defer, rather than these components increasing what actually happens is that you build-up a separate entitlement to increments, so your pension now consists of Basic State Pension, Additional Pension, Basic State pension increments and Additional Pension increments. I would be extremely surprised if the triple guarantee were to be applied to Basic State Pension increments, and amazed if it were applied to Additional Pension increments.

1.106 The Government will use the CPI for the price indexation of benefits and tax credits from April 2011.

The CPI provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI, because it excludes the majority of housing costs faced by homeowners (low income households are subsidised separately through Housing Benefit, and the majority of pensioners own their home outright), and differences in calculation mean it may be considered a better representation of the way consumers change their consumption patterns in response to price changes. This will also ensure consistency with the measure of inflation used by the Bank of England. This change will also apply to public service pensions through the statutory link to the indexation of the Second State Pension. The Government is also reviewing how the CPI can be used for the indexation of taxes and duties while protecting revenues.

1.107

In the last Parliament, the basic State Pension was uprated by the higher of prices or 2.5 per cent. This Government will uprate the basic State Pension by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011. CPI will be used as the measure of prices in the triple guarantee, as for other benefits and tax credits. However, to ensure the value of a basic State Pension is at least as generous as under the previous uprating rules, the Government will increase the basic State Pension in April 2011 by at least the equivalent of RPI. To ensure the lowest income pensioners benefit from the triple guarantee, the standard minimum income guarantee in Pension Credit will increase in April 2011 by the cash rise in a full basic State Pension.

hansi

So in plain English ( not Governmentspeak) does that mean the SSP will also rise ffom next April and not just the basic pension (as per the last Government's policy)?

hugheskevi

So in plain English ( not Governmentspeak) does that mean the SSP will also rise ffom next April and not just the basic pension (as per the last Government's policy)?

The last Government's policy was to uprate all components of State Pension by RPI. They also guaranteed to increase Basic State Pension by at least 2.5%. Hence when RPI became negative, Additional Pension (and all types of increments) was frozen whilst Basic State Pension went up by 2.5%.

In the future, Basic State Pension will increase by whichever is the highest of earnings/CPI/RPI/2.5%. Based on the latest Office for Budgetary Responsibility forecasts, that would be an increase of about 3.7% (2010 Q4 RPI)

Additional Pension (SERPS and State Second Pension) will increase by CPI. Based on OBR forecasts that is 2.7% (2010 Q4 CPI)

The amount of extra pension from deferring will probably increase by CPI (2.7% forecast as above), although this has not been explicitely stated so you cannot say for certain but I would judge it be a high probability.

Note that the stats quoted above relate to Q4, which isn't what uprating is based on, but shouldn't be far off.

Note that whilst those that have deferred might feel hard done by, the biggest losers by some margin are those aged about 60-65 with public sector pensions - the move to uprating those pensions by CPI rather than RPI is equivalent to a reduction in the value of the pension over the course of retirement of about 10% (roughly - based on my own approximate calculations).

With a £10,000 per year index-linked pension payable from 60 with spouse benefits being worth £200,000 or more, someone in this position has just lost the equivalent of £20,000 although most are unaware of the loss.