The Conservative party has pledged to introduce a “triple lock plus” for pensioners if it wins the general election, effectively meaning the state pension will never be subject to income tax.
Currently, the triple lock guarantees that the state pension rises annually by whichever is highest: inflation, average earnings, or 2.5 per cent. Significant uplifts in the last few years mean that the full basic rate state pension now stands at £11,500, only just below the personal allowance of £12,570, which has been frozen since 2021.
The Conservative manifesto pledge would raise the personal allowance for pensioners each year by the same margin, so by inflation, average earnings or 2.5 per cent.
Prime Minister Rishi Sunak says the scheme shows the party “is on the side of pensioners” and estimates that this would save pensioners £275 a year by 2030, when the state pension is forecast to exceed the personal allowance. It is calculated that this would the government around £2.4 billion a year.
This would obviously be less costly for the government than raising the personal allowance for all taxpayers.
The Labour Party has said this plan is “not credible”.
The proposals were welcomed by the pensions industry, who said it would help many pensioners. However, many called for a longer-term approach to pension reform.
The Pensions and Lifetime Savings Association (PLSA) points out that currently anyone with a full new state pension, plus workplace or private pension income of over £1,250 a year, is now liable for income tax.
PLSA director of policy and advocacy, Nigel Peaple, says: “This announcement will help many pensioners who have workplace or private pension income keep more of it by ensuring future increases in the new state pension do not in themselves result in pensioners paying more income tax than they do now. This is likely to be welcomed by pensioners.
“However, it is also important that the main political parties commit to improving the workplace pensions of younger workers by increasing the value of automatic enrolment pension contributions, gradually, over the next decade, from 8 per cent to 12 per cent of salary, with most of the rises falling on the employer.”
He points out that currently only half of pension savers are on track to achieve the retirement income identified as ‘adequate’ by the influential and independent Pensions Commission. “We at the PLSA estimate that 20 per cent of pensioners currently have an income below the Minimum Retirement Living Standard of £14,400.”
Standard Life retirement savings director Mike Ambery adds: “The combination of rising wages and high inflation mean that the triple lock has been extremely valuable over recent years. So much so that it is rapidly closing in on the tax free personal allowance limit. The impact of this has been to drag more and more pensioners into the tax system and the proposal on the table is designed to ensure that a gap is always maintained between the state pension and personal allowance so that this income remains tax free.
“There is some precedent for different allowances for pensioners as they are currently exempt from NI payments on earnings but this would be an additional advantage. The question likely to hang over this approach is one of intergenerational fairness as while there are a large group of pensioners struggling to get by, there are also many who are comparatively well off and it appears the policy would apply to both groups.”
Hargreaves Lansdown head of retirement analysis, Helen Morrissey describes this as a ” tax-cutting bonanza for voters over state pension age” who, she points out have not benefited from National Insurance cuts.
But Morrissey also raises the issue of intergenerational fairness saying this will reignite debate over this question. “There’s already a significant income head start built into the triple lock, and this will push pensioners further ahead. It’s fair to say not all pensioners are solely reliant on the state pension – those who have saved into a pension or SIPP for their retirement will continue to be affected by income tax.
“Anyone of working age will continue to face the threat posed by frozen tax thresholds – including the personal allowance. It has dragged an extra 2.6 million people under the age of 65 into paying tax since the 2020/21 tax year and is set to remain in place until April 2028. There will be plenty of new taxpayers of working age who wonder why they should pay a higher rate of tax purely because of their age.
“With the state pension bill continuing to boom, the concern is that future governments will be forced into making big changes such as hiking the state pension age still further in a bid to manage costs.
“Given that healthy life expectancy means that many people will be forced to leave work well before state pension age, it means people will be left with a gap of several years, where they are too ill to work but too young to get the state pension. Whoever wins the general election needs to implement a far-reaching review of the state pension system as a whole to make sure it remains sustainable in the long-term.”