State Pension to be taxed following rise

The full State Pension is due to rise to above £13,000 a year, raising fresh questions about the growing cost of the system and fairness between generations.

Under the ‘triple lock’, payments rise by whichever is highest of average wage growth, inflation or 2.5%.

The latest figures from the Office for National Statistics (ONS) showed total wage growth, including bonuses, stood at 3.9% in the quarter to July, down from 4.2% in the three months to June. These earnings figures would mean the full, flat rate State Pension would increase by 3.9% or £488 next April to £13,036.40.  

However, this won’t be locked in until the inflation figures for September are published in October, as they could in theory be higher than the 3.9% taken from total wage growth. The inflation figures for August were released on Wednesday, showing that inflation had risen to 3.1% in the 12 months to August, up from 2.9% in July.  

The State Pension age is rising to 67 in April 2028, but government spending continues to increase. The annual State Pension bill is expected to reach £154bn this year and could rise by a further £600m a year by 2029/30 according to estimates.  

Economists have raised concerns about the cost of the State Pension ahead of the Budget, as with this raise, pensioners are beating headline inflation at a time when many are struggling to keep pace, while pensioner groups argue that many older people still face poverty. Additionally, with this increase, the State Pension will breach the personal allowance threshold, making it in theory liable to be taxed. 

The ‘Triple Lock’ explained

The ‘triple lock’ refers to a well-known State Pensions policy introduced in 2010 by the Conservative and Liberal Democrat Coalition Government that ensures State Pensions rise every year by either the average earnings growth, inflation (as measured by the Consumer Prices Index) or a flat 2.5% - whichever is highest that year, hence the name ‘triple’ lock.

It was designed in principle to make sure that State Pension value would always have the best growth outcome each year for pensioners. The guarantee that the highest of the three variables will be what pensions grow by ensures that Pensioners have three layers of protection against inflation, hence the name ‘triple lock’. This is incredibly important in maintaining a level of healthy financial security for those relying on their pensions, as it guarantees growth irrespective of how volatile the economy becomes.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.