UK State Pension Calculations Will Change for Some in 2022

Following the UK’s exit from the EU, the government will be changing the rules with regard to the way your UK state pension is calculated. It will affect you if you relocate to the EU, EEA or Switzerland or if, in the past, you have resided in Australia prior to March 1 2001, or Canada or New Zealand.

The changes, if approved by Parliament, will take effect from January 1, 2022. From then onwards, you will not be able to take into account time spent residing in Australia, Canada or New Zealand before March 1 2001, when working what your UK state pension entitlement.

It will apply to the UK and Swiss nationals and citizens of the EU and EEA. It will also be relevant if you relocate to the EU, EEA, or Switzerland on and after January 1 2022. Whether you have claimed your UK state pension or not doesn’t matter. The pensionable sum will be determined solely by your UK National Insurance payments.

Those not affected will be people resident in the UK regardless of their nationality, and the UK and Swiss nationals plus citizens of the EU and EEA who worked in the respected zones before December 31, 2021.

If you remain resident in the same country, you will still be permitted to take into account any time spent prior to March 1, 2001, residing in Australia, Canada, or New Zealand.

Those living in EU and EEA countries and Switzerland will still qualify to have their UK state pensions increased annually in line with UK protocols.

Anyone residing outside these countries won’t get an annual increase. But should they return to reside in the UK, their UK state pensions will increase to the current standard.

The last increase to the UK state pension was 2.5%, effective from April 2021. It puts the figure at £179.60 per week for those who draw the full pension. In monetary terms, it represented an increase of £4.40 per week.

The yearly increase follows the “triple lock” ruling. It is a mechanism that was introduced back in 2010 to ensure that the pension doesn’t fall in real terms with regard to inflation. The system came under debate recently due to concerns about the COVID-19 pandemic making it too costly to maintain.

The triple lock mechanism takes three factors into account when reviewing a potential increase. They are:

  • The average earnings increase
  • How prices perform according to the CPI (Consumer Price Index)
  • A figure of 2.5%

In theory, it means that a 3% rise in average earnings would result in the state pension being increased by 3%.  If, however, if the rise in average earnings and the CPI fall below 2.5%, the pensions nonetheless will increase by 2.5%.

So, in effect, should wage and price growth remain below the 2.5% threshold, the pension increase would outpace inflation. With tight controls in recent years, this has happened on many occasions.

The announcement of the new pension calculation criteria comes at a worrying time for many UK nationals on the back of Brexit.  Many ex-pats have already returned to the UK amid fears of forfeiting their rights of UK residency and being able to access free healthcare abroad. In 2017, 475,000 UK pensioners were resident in EU countries. Since then, the figure has reduced by 8,000.

To quell fears about this latest announcement regarding the way pensions will be calculated in the future, the government has confirmed that only people who worked in Australia, Canada, and New Zealand will face cuts. In the government’s words, it is only a “very small” number of people due to retire after December this year who will be affected.

However, if you fall into this bracket, there are serious implications. How much state pension you get will affect the desired value of your retirement income fund: (private pension and workplace pension). You can use a pension calculator to estimate the change in personal contributions to be made: affected by state pension changes.

The fact of the matter is that the state pension is not exactly generous. It is actually the worst in the developed world, and not only that, it has the highest retirement age too. That is why it is so important to have a private pension too. It’s not a case of can you afford to have one, as much as you afford not to.

Author: Editorial Team

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