The UK government's long-standing guarantee on State Pensions could have unintented consequences for millions of pensioners, finance experts have warned. The so-called Triple Lock, which ensures that the State Pension increases in line with either consumer inflation, earnings, or 2.5 per cent, has been a measure used by governments to ensure.pensions rise in line with living costs. Both the Conservative and Labour parties have committed to honoring this guarantee until the end of the decade.
Mel Stride MP, the Secretary of State for Work and Pensions, has stated that the Triple Lock will likely be included in the Conservative Party manifesto for the next general election. Stride emphasised the importance of supporting pensioners who cannot increase their income through work. This year, the Basic and New State Pension saw a significant increase of 10.1%.
However, experts are warning that the Triple Lock agreement could see a huge spike in the number of peole paying tax, as inflation and interest rates rocket. According to the Bank of England's latest forecast, the CPI inflation rate is projected to be 7 per cent. If this forecast holds true, the Daily Record reports, it could result in more pensioners over State Pension age being subject to income tax.
Financial experts at wealth management firm Evelyn Partners have analysed the annual income tax statistics from HM Revenue and Customs (HMRC) and estimate that in the 2023/24 financial year, the number of people over State Pension age paying income tax will increase by 25% compared to the previous year. This means that 8.1 million pensioners will be paying income tax, up from 6.47 million in 2020/21.
Gary Smith, a partner in financial planning at Evelyn Partners, warns of a potential "policy showdown" between the Triple Lock and the freeze on the personal income tax allowance.
Smith explains, "Both the Conservatives and Labour have committed to the Triple Lock in their manifestos for the upcoming general election. However, the current UK Government's policy is to freeze the personal allowance at £12,570 until at least 2027/28, with no alternative policy proposed by Labour. If the Bank of England's forecast of 7% inflation for September is accurate, then assuming wage growth does not exceed 7%, the Triple Lock will raise the full New State Pension to £11,342 in the 2024/25 tax year."
This poses a dilemma for the future UK Government. They will have to decide whether to impose taxes on the State Pension, which would be highly unpopular among the more than 13 million people expected to be of State Pension age, or raise the personal tax allowance for everyone to avoid this issue. Currently, the full New State Pension leaves only £1,970 of the personal tax allowance untaxed. If it increases by 7% in 2024/25, only £1,228 of a pensioner's tax exemption will remain after accounting for the State Pension.
Consequently, more pensioners with even modest private incomes could be pushed into paying basic rate tax at 20%.
Mr Smith said: “While pension saving can still be very tax-advantageous - particularly if a saver is a higher or additional rate taxpayer in their working life but then a basic rate payer when they draw on their pension - this does serve to remind today’s savers of the value of ISAs, which can provide a valuable supplementary income to pensions during retirement which is not taxed at access. Although contributions to ISAs for most people will be from taxed income.”
Smith suggests that while pension saving can still offer tax advantages, it is crucial to consider the value of Individual Savings Accounts (ISAs) as a supplementary source of income during retirement. ISAs provide tax-free access to funds, although contributions are typically made from taxed income.
The full, New State Pension is worth £10,600 during the 2023/24 financial year. Finance experts at Evelyn Partners have calculated the possible annual payments over the next four financial years.
- 7% rise in 2024/25 - £11,342
- 3.5% rise in 2025/26 - £11,739
- 3.5% rise in 2026/27 - £12,150
- 3.5% rise in 2027/28 - £12,575
Earlier this year, the Institute for Fiscal Studies (IFS) expressed concerns about the long-term sustainability of the Triple Lock policy. In response, the government commissioned a review by Baroness Neville-Rolfe, which recommended capping spending on State Pensions at 6% of GDP to ensure fairness across generations.
The potential increase in the number of pensioners over State Pension age paying income tax has raised concerns among retirees. An online petition has been launched, calling on the UK Government to remove income tax on the State Pension. The petition, created by Ray Crawford, argues that individuals who have workplace or private pension schemes to support them in later life are unfairly penalised by paying income tax on their State Pension. The petition has garnered over 7,000 signatures, and once it reaches 10,000, the UK Government will respond to the proposal.
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