We now know how much income the state pension will pay next year. And while it’s welcome news, there’s a sting in the tail. Or rather, three.
There’s good news for state pensioners but there are triple lock disappointments too (Image: Getty)
This morning, the Office for National Statistics confirmed that consumer price inflation rose to 3.5% in September, up from 3.1% in August. September’s inflation figure is one of the three measures used to set the annual state pension increase under the triple lock. The other two are average earnings growth and the 2.5% minimum guarantee. We already knew that earnings rose by 3.9% in the three months to July. That’s higher than September’s inflation rate, so it will almost certainly determine next April’s state pension increase.
The full new state pension is set to rise by 3.9%, from £12,547.60 a year today, to around £13,036.96. That’s an increase of £489.36. That takes it above £13,000 for the first time ever. It’s a decent boost for pensioners, but that brings me to my first catch. It may not look so good when next April swings around, as inflation is forecast to keep climbing. The Bank of England projects it will hit 4.2% early next year. If correct, that means the state pension will slide in real terms, putting the squeeze on pensioners. The triple lock does brilliant work in boosting pensioner incomes, but may still deliver a sub-inflation increase next year. And there’s a second catch.
Older retirees receiving the basic state pension will also benefit from that 3.9% increase. Their annual payments will rise from £9,614.80 to £9,989.20, an increase of £374.40. Unfortunately, that’s more than £3,000 a year less than the full new state pension.
In practice, many basic state pensioners get that link topped up by other forms of pension, including SERPS and the state second pension. Some get more than the full new state pension in total, but others lose out. It’s a constant course of frustration, and the gap between old and new state pensions will continue to widen every year. Benefit from the same triple lock increase, but the new one has a much higher starting point.
As if that wasn’t enough, there’s a third catch. With the full new state pension climbing to almost £13,037, it will exceed the frozen £12,570 personal allowance for the first time, by around £467. In theory, a basic-rate taxpayer could face an income tax bill of about £93 on that excess.
Former chancellor Rachel Reeves promised that pensioners whose only income source is the state pension would not have to pay tax simply because it rises above the personal allowance.
That’ll only help around one in 20 pensioners in practice. Anyone with additional taxable income, such as a private pension or other state pension payments, will pay tax in the usual way. Some could face a shock tax bill simply for earning £1 from a savings account, private pension, or job, for example.
Crucial details about how this will work remain unclear, and pensioners will be looking to next week’s Budget for answers.
This problem will only intensify. The personal allowance is frozen at £12,570 until 2031, while the state pension will keep rising. More pensioners will therefore be dragged into the tax system as their incomes rise, even if their purchasing power barely improves.
There’s a fourth issue, as Andy Burnham plans to dilute the triple lock from April 2030, by removing the wages element. That potentially leaving pensioners with smaller increases in years when wages surge. It would have done this year. It all adds to the uncertainty.