The Chancellor has confirmed that the state pension will rise by 4.1 per cent to match the average earnings element of the triple lock. This means that next year’s full new state pension is set to reach £11,975.60 annually, an increase of £473. The increase, combined with pre-planned freezing of income tax thresholds mean full state pension will be 95 per cent of the personal allowance.
But chancellor Rachel Reeves confirmed that personal allowances for income tax will increase in line with inflation from 2028.
Steven Cameron, pensions director, Aegon says: “This increase is more than double the 1.7 per cent inflation figure announced earlier this month.
“The 4.1 per cent increase is based on the Triple Lock formula, under which pensions increase each April by the highest of three measures – earnings growth (the year-on-year rise in average earnings for the period May to July), price inflation (for the year to September, announced as 1.7 per cent earlier this month), or a minimum of 2.5 per cent.
“For those who reached state pension age before 6 April 2016 and who are on the full basic state pension, the increase would be around £6.95, bringing them to £176.45 per week, or £9,175.40 a year.
“A little-known rule is that any earnings-related element of the basic State Pension, relating to the pre-April 2016 rules, and top ups, are only increased in line with the rate of inflation and not the Triple Lock. Therefore, some may find their overall state pension increase lags behind the 4.1 per cent figure.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group says: “This will come as welcome news to many, however there are possible tax implications for pensioners. The Personal Allowance, which is the amount of income you can receive before paying tax, has been frozen since at £12,570 since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full new state pension payment has grown from 70 per cent of the allowance in 2019/20 to a likely 95 per cent next year, leaving pensioners with only £594.40 of headroom before they begin paying income tax.
“While the state pension is on the up, it’s worth remembering that it still falls short of the £14,400 a single pensioner needs for a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association (PLSA). For our younger generations, one way to future proof their retirement saving is to a look at workplace or private pension provision and make sure to check it matches with their retirement expectations – there are a number of online tools and calculators that can help with this.”