Jeremy Hunt’s autumn statement back in November 2022 marked his first announcement as chancellor. Following a tumultuous few months in British politics, Hunt confirmed that there were “no easy answers”.
Among the £55 billion of “consolidation” – in the form of tax rises, spending cuts, and allowance freeze extensions – the statement did include some good news for pensioners.
Following its suspension during the Covid crisis, the State Pension triple lock was reinstated, leading to a record-breaking pension rise from April 2023.
Keep reading for your look at current State Pension rules and amounts, and why the re-introduction of the triple lock could be bad news for your tax bill if you decide to defer.
A rise of £780 a year from April 2023 marks the biggest-ever State Pension increase
When the State Pension triple lock was suspended in 2022, it was due to a pandemic anomaly. The return to work at the end of the government’s “furlough” scheme saw average UK wages rise by more than 7%.
Under the triple lock, this would have meant a similar rise to the State Pension, something the government deemed unfair in the economic climate of the time.
Since then, average wage growth has stabilised but inflation has rocketed. This left Jeremy Hunt with a new conundrum.
How does the “triple lock” effect the State Pension?
Under the triple lock, the State Pension rises each year in line with the highest of:
- 2.5% rise
- Average earnings growth
- Inflation (for the year to September).
The Consumer Price Index (CPI) rose massively in 2022, reaching a 40-year high when it peaked at 11.1%. In September it stood at 10.1%. It is this percentage increase that Jeremy Hunt committed to in his autumn statement.
A 10.1% rise takes the new full State Pension to £203.85 a week, or £10,600 a year, from April 2023.
The basic State Pension will rise to £156.20, or £8,122 a year, in 2023/24.
The record-breaking State Pension rise could affect your decision to defer
What is ‘deferring’ the state pension?
The State Pension Age is currently 66 (rising to 67 between 2026 and 2028) but you don’t need to start taking it as soon as you become eligible.
If you receive a State Pension letter when you reach age 66 but you don’t want to start claiming yet, simply do nothing and it will automatically defer. Your eventual regular payments will begin to rise, depending on the type of pension you are due to receive.
What if I’m claiming the state pension, can I still defer?
If you have already commenced receiving your state pension, you have the option to temporarily suspend its payments. This might be the case if you decide to re-enter the workforce for a few years. It’s important to note that you can only make this choice once. In other words, you cannot begin receiving your pension, suspend it, resume, and suspend it again.
How much does my State Pension increase if I defer?
- Full new State Pension (for those reaching State Pension Age after 6 April 2016): An extra 1% for every nine weeks deferred, this could amount to around £540 a year.
- Old State Pension (for those reaching State Pension Age before 6 April 2016): An extra 1% for every five weeks deferred, or around 10.4% a year. The higher percentage is due to the lower starting amount for the basic State Pension.
Why would I consider deferring the State Pension?
There are pros and cons to deferring – one of which results from the recent triple lock rise – so it won’t be right for everyone. Here are the main points to consider:
You might consider deferring the State Pension if:
- You want to receive more when you do begin to claim
- You don’t need the extra income right now
- You still have an income, but you’re likely to drop a tax bracket when you eventually retire
You might still be working, in which case your State Pension could push you into a higher tax bracket when added to your salary, something you’ll be keen to avoid. Deferring the State Pension until you finish work could keep your total income within the basic-rate bracket. If you’re in good health, you might want to do without the extra income in the short term to benefit from higher, inflation-proofed income in the future.
The longer you defer your State Pension, the more you will receive each week when you eventually claim.
Why is deferring the State Pension a bad idea?
Deferring might not be right for you if:
- You need additional income now
You might have finished work or have a health condition that means the extra income is more useful now, whether to maintain your desired lifestyle or to help manage costs associated with care.
- You plan to defer for more than two years but worry about the tax implications
The Personal Allowance – the amount of income you can earn before Income Tax becomes due – is currently frozen at just £12,500 until 2028.
That means that deferring the new State Pension for just two years could see you breach the allowance and be liable for tax.
Get in touch
While the State Pension is unlikely to be your sole source of retirement income, it is a stable – and inflation-proofed – foundation on which to build.
At Hartsfield, we can help you to incorporate the State Pension into your long-term retirement planning tax-efficiently, and in a way that complements your other pension and non-pension income.
If you would like to discuss your State Pension entitlement or any other aspect of your long-term financial or retirement plans, please get in touch and find out how our team of expert planners can help.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.