The state pension triple lock is drawing renewed scrutiny over its long-term affordability, with some commentators calling for the policy to be scrapped. As the full new state pension edges closer to the frozen personal allowance threshold, more pensioners could face income tax bills on their state pension payments.
The full new state pension currently stands at £241.30 a week, or £12,547.60 a year. Official earnings data released this week indicate it is likely to rise by 3.9% from next April under the triple lock. That would take weekly payments to £250.70, equivalent to £13,036.40 a year, an increase of £488. The rise is expected to be confirmed after September’s inflation figures are published next month, but earnings growth is currently higher than inflation at 2.9% and the 2.5% floor.
The personal allowance remains frozen at £12,570. The combination of rising state pensions and the frozen tax-free threshold means the full new state pension is set to exceed the allowance for the first time. Retirees whose only income is the full new state pension would then face a small income tax liability.
The triple lock guarantees that the state pension increases each year by the highest of average earnings growth, inflation, or 2.5%. While the mechanism has protected pensioner incomes against the rising cost of living, the additional income generated by successive rises could ultimately be partly reclaimed through tax for some recipients.
Derence Lee, Chief Finance Officer at mutual society Shepherds Friendly, commented on the implications for those in or approaching retirement. “Due to the extremely high levels of inflation the UK has experienced since 2020, state pensions have been increasing at a rate that some experts believe to be unsustainable in the long term.”
“With pensions expected to surpass the frozen tax-free allowance limit next year, which will remain unchanged by the government until 2028, more retirees will be pushed into the tax-paying bracket. As a result, pensioners should begin to take into account that they may soon need to pay income tax on their pensions should no changes be made to the current status quo.”
“Whilst the triple lock has been helpful in ensuring retirees’ incomes keep up with the cost of living, taxing pensioners could have significant financial implications, particularly for those who rely heavily on their pensions to cover essential living costs and make ends meet.”
“To help with retirement costs, Pension Credit can help those of State Pension age on lower incomes. For example, single pensioners can get their weekly allowance topped up to £218.15, or £332.95 as a couple, both of which are below the tax-free allowance threshold. Furthermore, those still working part time or receiving self-employed income might consider making additional contributions to a private pension to help with costs once they retire from work completely.”
“For those looking to retire in the near future, they should consider how their income can be built up by saving into a tax-free ISA, growing their savings through investments where possible, and utilising workplace pension schemes to secure their future income during retirement. Due to the increasingly ageing population and the context of economic uncertainty, it can be hard to predict what the future of the triple lock will look like, so it’s always best to have a financial back-up plan in place where possible.”
Economists and think tanks have repeatedly highlighted the fiscal pressure created by the triple lock. The Institute for Fiscal Studies has estimated that retaining the policy until 2050 could cost around £20 billion a year in today’s terms compared with simple earnings indexation, although the figure could range between £5 billion and £40 billion depending on economic conditions. The Office for Budget Responsibility has also noted that the mechanism has already proved more expensive than originally projected.
Labour has pledged to maintain the triple lock, yet the approaching Budget is expected to involve difficult spending decisions amid high public borrowing and competing priorities. Pensioner groups continue to stress that many older people still face poverty, underlining the tension between protecting retirement incomes and ensuring the system remains affordable for future generations.