State Pension Set To Rise In April 2021 | moneyfacts.co.uk

Derin Clark

Derin Clark

Online Reporter
Published: 23/12/2020

The state pension is rising by 2.5% in April 2021, resulting in retirees getting up to an extra £228.80 a year.

State pensions are increased each year either in line with earnings, the consumer price index (CPI) or 2.5%, whichever is highest – known as the triple lock system. As inflation was 0.5% in September and earnings have remained low throughout 2020, the triple lock system means that retirees will receive a 2.5% increase to their state pension in April.

As a result of the 2.5% increase, from April those on the new full state pension will get an extra £4.40 a week, increasing the weekly pension to £179.60, which results in an extra £228.80 over the 12-month period. Meanwhile, those on the old full state pension, will get an extra £3.40 a week, increasing the weekly pension to £137.65, which results in an extra £176.80 over the year.

Although the 2.5% increase will be welcomed by pensioners, some finance experts are questioning how long the Government will continue with the triple lock system particularly as the country continues to feel the economic fallout from the Coronavirus pandemic.

How to boost your pension

Retirees who are looking to boost their pensions have various options available.

For those with a defined contribution personal pension, one option is taking a pension drawdown, which enables those over retirement age to tap into their personal pension pots as and when they need to. Since pension freedoms were introduced in 2015, it has been easier and become increasingly popular for retirees to access their pensions via pension drawdown. Those considering pension drawdown should take into account that withdrawing money from their pension pot will reduce the size of their funds and could result in them running out of money later in life. In addition to this, it is important to remember that tax is payable on pension drawdown, with just the first 25% withdrawn being tax-free.

Often, the alternative to pension drawdown, is to take out an annuity, which usually provides an income for the remainder of the retiree’s life. An annuity is purchased using funds from the retiree’s pension pot, but in recent years annuity rates have fallen which has resulted in pensioners receiving less income in return for their money. For more information on taking pension drawdown compared to an annuity read out guide annuities vs drawdown – which is right for you?.

Another option for retirees looking to boost their income in retirement is through equity release. This option is available to homeowners who have a large amount of equity in their home and involves taking out a loan using the equity they own in their property. Although the equity release loan does not have to be repaid during the retiree’s lifetime, unless they move permanently into a care home or the property is sold, it does have to be repaid once they have died. In addition to repaying the loan, interest is also added to the total amount owed. This could result in the retiree leaving behind a significantly reduced inheritance to their loved ones. Over the last few years the interest rates on equity release have been falling and the flexibility of products has increased. It is now common for equity release providers to offer drawdown products, which enable customers to take small amounts of the total loan amount agreed as and when they want instead of a one-off lump sum, which, as interest is only added to the money taken, usually reduces the amount of interest that accumulates. In addition to this, there are also options available that enable those taking equity release to make interest repayments during their lifetime, which helps to reduce the impact the equity release loan has on the inheritance they leave behind. Due to the long-term financial implications, those considering equity release should speak to an independent financial adviser to ensure it is the best option for them.

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Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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