Pensioners short-changed

Money

Pensions

Pensioners short-changed

Chancellor's 'promise' is not what it seemed for millions in retirement, writes Paul Lewis

A letter will soon be sent to more than 12 million older people, telling them that parts of their state pension will not increase in April. Although the basic state pension will rise by 2.5% – which will add £2.40 to the full rate of £95.25 – all the other sections, including SERPS, graduated pension, extra pension for deferring retirement and the increase which can be claimed for an adult dependant, will be frozen at their 2009 rate.

If you have not paid enough contributions you will get less than £2.40.

A woman claiming a pension on her husband’s contributions will normally get an extra £1.45.

On December 9, Alistair Darling told Parliament that inflation last September measured by the Retail Prices Index (RPI) was negative.

This index is used to fix benefits the following April. And that should mean benefits would be frozen in 2010. Then he said, "I do not believe that such a freeze would be fair. So I can confirm the basic state pension will not be frozen, but will rise by 2.5 per cent in April."

The get-out word there was "basic". The basic state pension will rise by 2.5%. Any other part that does not count as "basic" will actually be frozen. Someone who has the full basic pension of £95.25 topped up by SERPS and graduated pension of £33 a week will see their pension rise by less than 2%, rather than the 2.5% many thought they had been promised by the Chancellor in his Pre-Budget speech.

This meanness will cost a man with average SERPS nearly £42 a year. Those on the highest SERPS will lose more than £200 over the whole year. It will save the Government about £350 million off the cost of pensions in 2010/11.

These additions to the state pension – and several others paid to very few people – are the only benefits which will be frozen. Pension Credit will go up by 2%, raising the minimum guaranteed income to £132.60 a week for a single person and £202.40 for a couple. Means-tested benefits such as income support and jobseeker's allowance, will rise by 1.8%. All the other main benefits, including child benefit, disability benefits, and carer's allowance, are normally linked to the RPI. Instead, Alistair Darling announced they would rise by 1.5%.

But in another economy with the truth, that 1.5% rise will in fact be taken back from the rise due to be paid in April 2011. That will follow the RPI in September 2010, which the Government estimates will be 3%. But in April 2011, instead of rising by the full RPI, benefits will rise by the RPI minus the 1.5% given in April 2010.

Written by Paul Lewis, this article first appeared in the February 2010 edition of Saga Magazine. Paul's opinions are his own and for general information only. Always seek independent financial advice.