By Kate Smith

For many the state pension is the bedrock for providing income in retirement. This is especially the case for those on low incomes or those who haven’t built up additional pensions savings through a workplace or personal pension.

Because of its financial significance, it’s a good idea for everyone to be aware of any changes made to the state pension and understand how much we will get and from what age.

An important change to the state pension is scheduled from next April. For one year only, the Government is suspending the “triple lock”. This was introduced as part of the Coalition Agreement in 2010 to provide a safeguard the state pension won’t lose its value in real terms due to inflation.

The triple lock means both the basic state pension and new state pension introduced in 2016, increases by the higher of 2.5 per cent, the rise in national average earnings or the Consumer Price Index (CPI).

The triple lock was first used to increase state pensions from April 2011 and has been a firm favourite of pensioners ever since. Typically, it has meant above-inflation increases.

The lock has been in the spotlight since the Covid-19 pandemic has led to huge distortions to the increases in average UK wages. With the reopening of the economy and as people return to work – many from reduced wages on the furlough scheme – official figures show average earnings have surged at an unprecedented rate to 8.3%.

Sticking rigidly to the triple lock formula would have granted pensioners an April increase of 8.3% due to a statistical anomaly, raising serious questions around intergenerational fairness at a time when people’s earnings are still recovering from the pandemic.

State pensions are funded on a “pay as you go” basis and paid from the National Insurance contributions (NICs) made by today’s workers. Unlike private pensions, state pensions are not funded in advance.

After much speculation, the Government announced the break in a manifesto commitment by suspending the earnings element of the triple lock for the tax year 2022/23. This means state pensions will go up by the higher of 2.5% or the rise in September CPI. The one-year suspension will save the Government about £4.5 billion to £5bn next year and every future year.

Pensioners will be disappointed by the move to the “double lock” but, despite this, they are still in line for a substantial increase. The September CPI increase is due to be announced this month and going by the latest figure, which shows inflation currently sitting above 3%, I forecast it to be on an upward trajectory.

Since the triple lock was introduced, the state pension has seen an above-3% increase only three times.

The new state pension may look simple on the surface, and people often assume they will receive the full amount of £179.60 a week (£9,339.20 a year), but to be eligible to receive the full state pension you need 35 qualifying years of National Insurance contributions or credits.

However, your new state pension entitlement may be affected by complex transitional rules designed to make sure no-one loses out by getting less under the new state pension than they were entitled to under the old state pension rules.

So, it’s important to find out what your state pension will be and check whether you have any gaps in your NI record.

The Government provides an online service to allow you to do this. If you do have any gaps, it may be possible to pay voluntary NICs, but before doing so check with the DWP that doing so will increase your state pension – as this isn’t always the case.

The state pension age has been increasing gradually in recent years and starts to rise to age 67 from 2026. The Government cites increasing longevity for the changes, suggesting that future generations should only spend up to one-third of their adult life in retirement.

It’s not possible to receive your state pension early, unlike with private pensions. However, there have been recent calls to allow early access to the state pension, to help those working in more physically demanding occupations where it’s more difficult to keep on working until state pension age. We have also seen a dip in life expectancy following the pandemic, although this is expected to be temporary.

While there might be a case for offering early access at a reduced level, there would be significant challenges around implementation to ensure people’s income from the state pension and any private pension is higher than the means tested benefit level.

Whatever future changes are made to the state pension, history shows the need for clear and early communication from Government. This is essential so people have time to adjust their plans.

Kate Smith is head of pensions at Aegon.