State pension to rise by £1,000 next year – but not for everyone

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Millions of pensioners are on track to lose thousands of pounds in retirement because part of their pension has been frozen.

People who do not receive the full state pension because they have been “contracted out” by their employer will face a real drop in income as inflation climbs to 11%.

The state pension will increase by a record amount next April, in line with September’s inflation rate, which is expected to exceed 10%. Those receiving the new state pension should receive a £1,000 income boost as a result.

However, former private sector workers on a ‘defined benefit’ pension could be left out of the entire increase as the money they were promised in place of the state pension has been frozen. . This means that part of their income will not increase with inflation, or the increase will be capped at 3%.

Former public sector workers have been protected as the government continues to pay inflation-related increases.

Experts have warned this has created an unfair divide among pensioners.

Colin Smith of consultancy Willis Towers Watson said: ‘The government changed it for public sector workers and it was seen as an acceptable cost to taxpayers. But this is not the case for workers in the private sector, who have remained frozen.

Sir Steve Webb, a former pensions minister and now a partner at consultancy LCP, said this had not been a problem when inflation was low, but many would now face a squeeze on their incomes next April when they would be denied the full raise.

“The government decided it was not fair for public sector workers to freeze it, so they are funding it. It’s a bit strange that it wasn’t extended to everyone and the communication about it was really poor,” he said.

A 65-year-old reader who was contracted out for many years said he feared a large part of his pension could be frozen.

“It’s an injustice,” he said. “This is a serious problem; my wife has half of her pension frozen. Why is it acceptable that we are frozen and have capped growth, but not others in the public sector? It has been made clear by the government that it is a mistake because it fixed it itself.

“I swallowed it when inflation was low but now it’s going to do real damage.”

Millions of people have spent at least a year contributing to a “contracted” pension, which is supposed to replace part of their public pension. Anyone who has been contracted has paid lower national insurance contributions and therefore their state pension may be lower.

The money was instead placed in their working pension and is known as the ‘guaranteed minimum pension’. This pot used to increase with inflation every year, but that is no longer the case. All GMPs accumulated before 1988 have been frozen entirely, while those accumulated after 1988 increase with inflation but are subject to a 3% cap. That means retirees could miss more than 7 percentage points of a raise in April 2023.

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