Pensioners are set to receive just shy of £500 extra in their state pension next year after September’s consumer prices index (CPI) inflation print came in above expectations at 3.5%.
The state pension increases each April by the higher of 2.5%, inflation or average earnings. These figures are based on September figures to allow the government time to prepare.
Claire Trott, head of advice at St. James’s Place, said: “With today’s inflation figure coming in at 3.5%, below the 3.9% wage growth figure published in September, earnings are set to determine the triple lock as expected. This puts the full new state pension on course to rise by around £490 a year to just over £13,030 next April.”
It is the first time the state pension has overtaken the personal allowance, which currently stands at £12,570, and means retirees will get £250.70 a week.
The government has confirmed that once the state pension clears the frozen personal allowance, pensioners whose sole income is the state pension will not need to fill out a tax return, with any tax owed taken automatically.
It has gone further by suggesting that any income tax for these retirees could be waived, although this has yet to be confirmed. Regardless, pensioners who draw on other sources of income, such as workplace or private pensions, savings or earnings from work, may find themselves with a higher tax liability as a result, said Trott.
Andrew King, pensions specialist at wealth management firm Evelyn Partners, noted that more clarity is needed from the upcoming Budget.
If those who receive the state pension alone are not charged income tax, “that could be viewed as unfair by those who do have a smaller state pension but additional private income and so have to pay the tax,” he said.
What we do know for certain is that prime minister Andy Burnham and chancellor John Healey have plans to row back the triple lock on the state pension, reducing it to a double lock. This will remove the average earnings portion of the calculation.
However, this will only come into effect from 2030, meaning it is contingent on Labour winning the next general election.
Jon Greer, head of retirement policy at Quilter, said: “While that new framework is likely to be less generous than the current system, if earnings continue to outpace inflation over the next few years, pensioners could still benefit from further meaningful increases before the reforms take effect.
“In that sense, the impact of the earnings link will continue to be felt long after the current version of the triple lock has gone.”
The state pension remains a “crucial source of income”, with Quilter’s Retirement Lifestyle Report showing it accounts for almost a quarter of retirement income on average.
Rachel Vahey, head of public policy at AJ Bell, said: “This isn’t the end of tough decisions on the state pension,” with the state pension age also under consideration. The government has committed to upping the age from 67 to 68, but the timeline is undecided. Although currently scheduled for the mid-2040s, it could be brought forward.
“Deciding when to bring forward the move in the state pension age from 67 to 68 is still hanging over this government. If the government wants to bring forward this change to the late 2030s, it will need to make the call soon to give people at least 10 years’ notice in line with convention for increasing the state pension age,” she said.