What to expect with the increase in state pensions

By Paul Lewis, Monday 13 February 2012

Increases in state pension, pension credits and other benefits start in April, but don’t hold your breath hoping for a windfall. And in some cases, there will be very real losses
Personal financePersonal finance

More than three million people over 65 will get an increase in their pension next year that is well below inflation. Some could see their total weekly income rise by less than 2%.

The people affected are the three and a quarter million who get pension credit. Some will see their weekly income rise by as little as £3.34 if they are single or £5.02 for a couple.

For those with incomes high enough to take them above the level to get pension credit the news is better. The whole of their state pension will rise by 5.2% – and for once the same rise is applied to the basic pension and to any extras such as SERPS or graduated pension. That means the full basic state pension of £102.15 a week will rise to £107.45. The extra £5.30 is the biggest cash rise ever seen and the rise in SERPS and graduated pension is also higher than has been seen for many years. However, all are going up in line with the Consumer Prices Index not the Retail Prices Index – if the old index had been used the basic pension would have risen by another 40p a week to £107.85.

Those increases for the better off are in sharp contrast to the plans for the lowest income three million on pension credit. They fall into two groups. Those who get only the guarantee credit – which includes those under the age of 65 and the over-65s on the lowest incomes – will get a rise of £5.35 a week (or £8.20 for a couple). That should take their total income up from £137.35 to £142.70 (£209.70 to £217.90 for a couple). That is a percentage rise of 3.9% in their total income including pension credit. This increase is well above the rise in wages – just over 2% – to which pension credit is normally linked.

The remaing two million over-65s on savings credit who have slightly higher incomes will get a weekly increase as low as £3.34 (or £5.02 for a couple) and the percentage rise for some could be less than 2%.

For example, someone who has a full basic state pension of £102.15 and a fixed annuity from a personal pension of £30 a week will see their state pension rise by £5.30, but their pension credit will actually fall by £1.96 from £22.60 a week to £20.64, leaving them with an increase in their weekly money of just £3.34, which works out at a percentage rise of 2.2%.

Someone with a state pension of £102.15 and SERPS of £30 will do rather better. Their basic pension will rise by £5.30 and their SERPS by £1.56, which will give them a state pension of £139.01. Their pension credit will be cut from £22.60 to £20.02, leaving them with a rise of £4.28 – which is 2.8% more than they get now.

Reasons for restrictions

The Government says that restricting the rise for the 2.1 million people on savings credit will pay for the above-earnings rise for the 1.1 million poorest who get just guarantee credit.

But there is another reason. These lower increases are a deliberate policy by the Government ‘to limit the spread of means-testing-up the income distribution for pensioners’. The changes mean the upper income limit for getting pension credit has been frozen at around £189 a week (single) and £277 a week for a couple, and the maximum pension credit that can be paid has been cut by nearly £2 for a single person and by more than £3 for a couple.

Credits and benefits

Other benefits for those who are under women’s state pension age, disabled, carers, single parents or unemployed, will generally increase by 5.2%. But child benefit is frozen until 2014. Many elements of tax credits are also frozen. That will particularly affect people in low-income jobs without children who will see no rise in their credits from April. The extra tax credit for those over 50 who have been out of work for six months or more will also come to an end in April. People over 50 who get this credit may see all their tax credit disappear. The maximum loss will be £39 a week.

State pension age

Just weeks after Parliament agreed to raise the state pension age to 66 by October 2020, the Government has announced a further rise to 67. The latest change will begin in April 2026 and affects men and women born April 6, 1960 to April 5, 1969. Those born April 6, 1960 to April 6, 1961 will reach state pension age between 66 and 67. And those born April 6, 1961 to April 5, 1969 will reach pension age on their 67th birthday. Further rises in state pension age are expected for those born later than that.

Women’s state pension age in 2012/13 will start at 61 and rise to 61½ by the end of the tax year –the age at which men and women can claim pension credit and, in England, free bus travel. The age will rise to 65 for men and women by late 2020. In Scotland, Wales and Northern Ireland free bus travel begins at 60 and NHS prescriptions are currently free to all. In England prescriptions are free from age 60.

Tax allowances

From April 6, 2012, you will be allowed to keep more of your own income before tax has to be paid. No tax at all is due on an income of £8,105 or less. People aged 65 to 74 (born April 6, 1938 to April 5, 1948) can earn £10,500 a year before tax is due and those aged 75 or more (born April 5, 1938 or earlier), £10,660. The blind person’s allowance rises to £2,100.

People who reach 65 in the tax year 2012/2013 are entitled to the higher age allowance but it will not normally be given by HMRC until another year has passed. The tax due in 2012/13 will then be corrected. It is a daft system and a strong protest to your local tax office may get you the higher allowance from the start. People with higher incomes may not get these age allowances. They are reduced if total income is £25,400 or more (up from £24,000 in 2011/12). If income exceeds £30,190, the 65-74 allowance will be the same as for younger people and the extra allowance for over 75s disappears when income reaches £30,510. Income in the band between £25,400 and these upper limits is effectively taxed at 30%.

The married couple’s allowance (given if one spouse or civil partner was born before April 6, 1935) will rise in value from £280 off one tax bill to £296. That is reduced if one partner’s income exceeds £30,510 and disappears if it exceeds £40,000.

If your income is higher still, you may have to pay tax at the 40% rate. That rate is charged on income above £42,475, exactly the same level as 2011/12. If your income exceeds £100,000 then your personal allowance is reduced and disappears completely in 2012/13 at an income of £116,210. Income between £100,000 and that limit is effectively taxed at 60%. Income over £150,000 is taxed at 50%.

This article originally appeared in the February 2012 issue of Saga Magazine.

Read Paul Lewis on the April 2013 pension changes here. Subscribe to our fortnightly money newsletter for the latest money news and money saving tips delivered straight to your inbox.


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  • Brenda cox

    Posted: Monday 01 July 2013

    I am paying tax in the uk and a British citizen I collect a uk pension but now
    Currently living most of the year in australia I know if you are living in australia
    Your pension doesn't increase but does this apply if you are still paying uk taxes
    And contributing to the uk economy

  • David Wanless

    Posted: Thursday 21 March 2013

    My Father in law Gets pension credit, When Pensions change in 2016 will he lose it and just get the £144.00.


    Posted: Monday 11 March 2013

    besides the state i get three personal pensions which I paid in for - lucky you I hear people saying one is a gm pension thank you to them but two are small pensions which pay out no more than £70 a month each which is then taxable at b a rate is there no way this tax can be avoided as I have no wish to pay it ta

  • shirley

    Posted: Thursday 10 January 2013

    can we get a discount on councul tax in cyprus after the age of 65, I have been told it is poss, await your reply please on this.

  • derek sharp

    Posted: Tuesday 27 November 2012

    i was 65 in october and can not afford to stop working am i still able to claim oap what do i do to get it thanks derek

  • James

    Posted: Sunday 18 November 2012

    I have absolutely no sympathy for UK pensioners moaning about not getting uprates in Canada. A Canadian citizen, I lived and worked in Canada for in excess of 20 years. I also lived and worked in the UK. I am filling in the forms for the UK OAP. No problems, they use tax records and all is accurate. Canada, well the Canadian civil service has been a disgrace every time I have needed to use them. They are asking me for old airline tickets or no pension. Useless country and civil service.

  • alfred vella

    Posted: Thursday 06 September 2012

    i am 75 years my stat pension is £142 a week is my pension going to increase ?

  • Robert Davidson

    Posted: Tuesday 21 August 2012

    It is incredible that people living in the USA (not a Commonwealth country) are treated better than in Canada who have the Queen as Head of State and receive more pension than Canadian ex-pats. The US is one of the richest countries in the world yet their UK pension is indexed while the pension for those in Canada is not. Since when does the USA president carry more weight than the Queen in UK affairs. It is time to end this discrimination against monarchist countries. The US left Britain

  • Carole Grant

    Posted: Sunday 03 June 2012

    I am due to retire next may. I will be 61 and do not have the full 30 years paid nic's. I have heard that we will get more increases to line us up with the £107.45 pension, is this true. I also lived in Australia for 10 years but only worked for 2 years, does this count towards my pension? I worked for a chinese company and was paid cash in hand,I don't know if he stopped me national insurance!
    Thank you
    Carole Grant

  • b gates

    Posted: Thursday 24 May 2012

    After reading your article about tax allowances, and as my 65th birthday falls in the 2012/2013 tax year I phoned the Tax Office. They have now increased my allowance for the 12/13 year to £10,500 without hesitation. I now have my new code. Thank you for this information.

  • Alexander Litchfield

    Posted: Tuesday 01 May 2012

    I can never understand why pensioners are surprised at the perfidy exposed by politicians after elections.
    Be a little patient.A few months prior to each general election there's always a little honey on the end of the stick!
    Just ignore it and after they get in, it all disappears again.
    I've despised politicos for over 65 years and I don't suppose that will change.

  • Helen

    Posted: Wednesday 25 April 2012

    I don't see why pensioners who move to an EU country should have their pensions frozen! They have paid in the same as everybody else. Especially remember that in the case of places like Cyprus, which is home to thousands of ex-pats from UK, Britain seized so much land from the Cypriots they caused a famine in 1937. Now Cyprus is part of the EU and should be treated like the UK and all other members. It does not matter where pensioners live, we should all get the same.

  • J Aylin

    Posted: Tuesday 10 April 2012

    Are DWP going to stop paying pensions by giro ?

  • Margaret Ashwell

    Posted: Tuesday 27 March 2012

    No-one has mentioned the thousands of women who paid the married womans insurance stamp and retired on the small pension from her husband's stamps. I paid it from 1975-2002 unaware I would get nothing back from this. Can anyone tell me what happened to all my contribrutions which were practically the same amount as those paying the full stamp.My pension is £64.10. i feel very let down.

  • Robert Waite

    Posted: Friday 23 March 2012

    I have 2 comments which will probably be disliked. 1) Those who live overseas, chose to do so, and it was up to them to check on the repercussions on their pensions. If you had stayed in the UK, you would still be getting pension rises. 2) Those of you who were getting more than just the state pension, got a 5.2% rise in the state pension portion, the rest is some sort of benefit payment and not "locked" as is the pension, so it can go up or down. So just hope, like me, for better times to come.

  • Martin L Smith

    Posted: Friday 23 March 2012

    Following the Chancellors attaxck on the basic pension next year will this have the same effect on GRB and Additional State pension? We didnt opt out in the 80/90 in order to pat for these and were taxed at the rates as it was then. will be be robbed on these benfits too/

  • Norman Blackford

    Posted: Sunday 11 March 2012

    Although it does not affect me, I believe something should be done about the freezing of state pensions because of their address. I am aware of a couple who fraudulently avoid the freezing by registering being living at a family member's UK address and using that address for their UK bank account into which their pensions are deposited.

  • Philip Johnson

    Posted: Friday 09 March 2012

    A married couple both pensioners can not exchange balance of Tax Allowances as they used to be able to do. We have a state pension each but my wife's total pension income does not reach the tax threshold. My pension income goes above it and I have to pay tax. The total income is below £22000 but it would be slightly more if I could set my wife's unused allowance against my bill.There are only Pensioner Couples if they can be taxed jointly. Bring back Family Values and less mutual suspicion.

  • Alan Wiseman

    Posted: Thursday 08 March 2012

    Why have they changed the tax allowance dates for the people attaining 65yrs of age this coming tax year? Being cynical is it that the government has done it's sums and hence those that die in the next year never get their rightful dues and it saves on tax? It's a stressful enough time with the reduction in one's income without being penalised again. How unfair!
    When occupational pensions are based on opposite sides of the country, what passes as one's "local tax office"?

  • M Smith

    Posted: Thursday 08 March 2012

    At present I receive £1.38 pension credit per week. Because of the £5.30 rise in state pension i will lose my pension credit in April, giving me £3.92 extra. Also, I lose out on adult education fees, council tax and help with the vets. I will have to give up evening classes of £180 per term and hoper my pet remains healthy. I shall be much worse off, but obviously the Government doesn't care!

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What to expect with the increase in state pensions

Increases in state pension, pension credits and other benefits start in April, but don’t hold your breath hoping for a windfall. And in some cases, there will be very real losses

What to expect with the increase in state pensions

Increases in state pension, pension credits and other benefits start in April, but don’t hold your breath hoping for a windfall. And in some cases, there will be very real losses

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