The state pension is set to rise by 3.9 per cent next April in a move that will make it taxable for the first time.
Data published by the Office for National Statistics (ONS) on Tuesday showed weekly wages grew by 3.9 per cent between May and July.
The triple lock guarantee means the government will increase the state pension by whichever figure is highest out of wage growth, inflation or 2.5 per cent.
If confirmed, a 3.9 per cent increase will raise the full new state pension by around £9.40 a week, lifting payments from £241.30 to approximately £250.70 per week.
Across a full year, that would lift someone on a full state pension from £12,547.60 to £13,036.40, meaning for the first time, it would surpass the personal allowance of tax-free income.
For pensioners whose sole source of income is the state pension, an exemption was declared by Rachel Reeves last year, when she was chancellor, so that they will not pay any tax at all on it, even though it surpasses the threshold.
But speaking on BBC Breakfast, business secretary Jonathan Reynolds wouldn’t rule out changes or whether pensioners would be taxed, noting “that is for the chancellor and for a Budget”.
“The majority of pensioners in this country don’t just rely on the state pensions. Some do, I accept that, but the majority don’t,” he said.
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“So I think sometimes when this is looked at, we’re focusing just on the state pension side of this. You’ve got to consider the full range of income retired people in the UK have, living the good lives they deserve in their retirement.
“A pension is income, and of course, the vast majority of people in Britain have their own private pension provision alongside the state pension.
“So this wouldn’t be a substantial change for them. They’d already certainly received an income in that case above the personal allowance.
“Now, any changes to personal allowances to tax rates, you know, I’m going to say, take place in the Budget. That’s on the 28 October. But I do think sometimes when we talk about this, and of course the government’s commitment to the triple lock means that that’s the reason we’re seeing significant increases in the state pension.”
In terms of the triple lock, because Consumer Price Index (CPI) inflation is projected to remain below the 3.9 per cent wage benchmark over the key September measurement period, earnings growth is expected to determine the final rate of state pension increase.
The Bank of England forecasts inflation will peak at around 3.2 per cent later this autumn, well below the three-month wage growth average.
Official September CPI inflation figures, which serve as the alternative threshold in the calculation, will be published on 21 October.
Therefore, unless inflation experiences an unexpected spike, the 3.9 per cent increase will see the full new state pension rise, providing a boost to millions of pensioners across Britain.
The Department for Work and Pensions will formally confirm the revised payment rates during the autumn statement after the data is finalised next month.
However, for those who have any additional sources of money besides the state pension, they will pay back a small portion of this payout in tax.
The personal allowance is £12,570, meaning £466 of a full state pension would be above that figure and liable to tax – so £93 for a basic-rate taxpayer. In reality, the figure would actually be slightly lower if a portion of the first week of pension payments is paid at the previous year’s figure.
David Brooks, head of policy at leading independent financial services consultancy Broadstone, suggested the latest lift and paying tax on pension income will inevitably lead to further discussion over a change of policy, perhaps reducing to a “double lock” rather than the triple lock currently in use.
“The full new state pension now exceeds the personal allowance, a landmark that will inevitably draw further attention to the impact of frozen tax thresholds and the substantial increases we have seen in the state pension over recent years,” he said.
“The increase will sharpen the question of whether the triple lock remains affordable over the long term given the UK’s precarious public finances. It is important not to throw the baby out with the bathwater as protecting pensioner living standards remains vital, but the system also has to be fair and financially sustainable across generations.
“Transitioning to a double lock that protects increases in line with working-age benefits would seem the most likely compromise given it is today’s workers who ultimately fund the state pension.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, urged those still working not to fall into the trap of thinking the state pension, while rising, would be enough to see them through retirement.
Adding funds to workplace pensions or SIPPs, even in small amounts, would significantly boost their chances of having the retirement lifestyle they imagined, she added.
“HL’s Savings and Resilience Barometer shows only 43 per cent of households are on track for an adequate retirement – the state pension will get you some of the way, but not all of it,” she said.
“If you want more from your retirement, you need to take your pension planning into your own hands.
“If you have a gap between what you have and what you need, then taking small actions, such as boosting contributions every time you get a pay increase or promotion, could have a big impact over time.
“If your employer is willing to increase their contribution if you increase yours – known as the employer match – then this can also make a big difference. This steady drip feed of contributions invested over the long term can transform your retirement.”
