The triple lock pension is set to get a boost next year as the state pension rises by £490. New earnings growth data released on Tuesday indicates the state pension will increase by 3.9 per cent. This figure is derived from wage growth including bonuses, which determines the annual uprating under the current mechanism.
£13,036 pension and tax concerns
The full new state pension could amount to about £13,036. This amount exceeds the tax-free personal allowance of £12,570. Labour has promised that those relying solely on the state pension will not be expected to pay income tax. However, pensioners receiving cash from other sources could see more of their income taxed if their total exceeds the allowance.
Hargreaves Lansdown calculations note the rise will hand pensioners a £490 boost next year. Inflation figures on Wednesday are expected to come to 3.1 per cent. This contrast between the 3.9 per cent earnings growth and the anticipated inflation rate highlights the volatility the uprating mechanism faces.
Financial strain and future costs
The rise in the state pension pot adds to pressures facing Chancellor John Healey as he draws up his first budget. Liam McLaughlin, an associate economist at the National Institute of Economic and Social Research, said the rise would be “adding fiscal pressure at a time when the triple lock is already under scrutiny.”
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Economists have widely criticised the mechanism behind the triple lock pension as “unsustainable” for the public finances. The Institute for Fiscal Studies warned that keeping the triple lock could cost the government up to £40bn more a year in today’s terms than if it rose were linked to solely wage growth. Jonathan Cribb, deputy director of IFS, warned that the more “volatile” inflation and average earnings growth were, the “higher the cost” to the taxpayer.
Spending on pensioners will amount to about £196bn by 2031, according to forecasts published in March. The state pension triple lock is projected to cost nearly £16bn more per year by 2030 than if a standard earnings-linked rise was maintained, a figure nearly three times the initial forecast the independent forecaster predicted when the mechanism was introduced.
Even though the government promises no tax on the basic state pension alone, the 3.9 per cent hike means anyone with a private pension or other income will see their taxable total increase, potentially pushing them into a higher tax bracket despite receiving a larger payment.