As of 8^th April, there has been an 8.5 per cent increase to state pensions, making the new headline rate £221.20 a week – up £902 a year to around £11,500.

Chancellor Jeremy Hunt has also said the Conservative Party will keep the triple lock system to decide rises in the state pension if they win the election, which must be held by 28 January 2025. This will take the weekly new full state pension payment to £221.  

The full new state pension, paid to those who reached pension age after 2016, will be £11,502.40 a year.  But this pushes hundreds of thousands of pensioners closer to the upper limit of their personal allowance. The full rate has got much closer to the £12,570 personal allowance, the threshold at which people start paying tax.

This ‘stealth’ tax trap means they can receive additional income of only £1,067.60 a year before having to pay income tax.

Chancellor Jeremy Hunt acknowledged upholding the policy and increase to state pensions triple lock would be an “expensive commitment”, but explained the party was confident that it would “deliver the economic growth that is going to pay for it.”

The full basic state pension rises each year in line with the highest of three factors: earning growth figures between May to July the previous year, CPI inflation from the previous September, or 2.5%. This system is known as the triple lock.  The wages growth figure last autumn decided the latest rise.

The inflation rate has fallen sharply in recent months – it was 3.4 per cent for the year to February, down from 4 per cent in January – which means the state pension will stretch further.

The rise in state pension will also see millions more retirees paying more in income tax, due to something called fiscal drag.  According to the Institute for Fiscal Studies, the government could be spending as much as £45billion on the state pension. (Scroll down for more information on stealth tax trap)

What is the triple lock on state pensions?

The “triple lock” pension system in England is a policy mechanism designed to ensure that the state pension increases annually in line with inflation, earnings, or by a minimum of 2.5%, whichever is highest. It was introduced to protect the purchasing power of pensions and to provide stability and predictability for pensioners.

Here’s a breakdown of each component of the triple lock:

1. Inflation: The state pension is guaranteed to increase each year by the rate of inflation as measured by the Consumer Prices Index (CPI). This ensures that pensioners’ income keeps pace with the rising cost of living.

1. Earnings: The state pension is also linked to growth in average earnings. Specifically, it increases each year by the growth rate of average earnings, ensuring that pensioners benefit from improvements in national income.

1. Minimum increase of 2.5%: Even if inflation or earnings growth is lower than 2.5%, the state pension will still increase by at least 2.5% annually. This guarantees a minimum level of increase, providing a safety net for pensioners.

The triple lock mechanism was introduced as a commitment by the government to ensure that pensioners are protected from financial hardship and can maintain a decent standard of living in retirement. However, it has faced criticism for potentially being unsustainable in the long term, especially as life expectancy increases and the population ages. Some argue that the triple lock places a significant burden on public finances, especially during periods of economic downturn or when other areas of public spending are under pressure. Nonetheless, it remains a key feature of the UK’s pension system, providing reassurance to retirees about the security of their income.

What is the stealth tax trap?

Because of the rise in pensions an official analysis of the Prime Minister and Chancellor Jeremy Hunt’s tax plans has revealed that up to 600,000 people will be dragged over their personal allowance threshold – the point at which you must start paying tax

The term “stealth tax raid” on pensioners refers to the government’s decision to temporarily suspend the triple lock mechanism for state pensions in the UK for four years, which effectively results in a reduction in the rate of pension increases compared to what would have been guaranteed under the triple lock.

The triple lock mechanism, as previously explained, guarantees that the state pension will increase annually by the highest of inflation, average earnings growth, or 2.5%. However, due to exceptional economic circumstances caused by the COVID-19 pandemic, the government announced in 2020 that it would temporarily suspend the earnings part of the triple lock for four years.

Here’s how it relates to the triple lock:

1. Suspension of earnings part: The government decided to suspend the link between state pension increases and average earnings growth for four years. This means that during this period, state pensions would only increase by the higher of inflation or 2.5%, effectively removing the earnings growth component from the calculation.

2. Impact on pensioners: As a result of suspending the earnings part of the triple lock, state pension increases over the next four years are likely to be lower than they would have been under normal circumstances. This means that pensioners may see smaller increases in their state pension income compared to what they might have expected under the triple lock.

3. Reasoning behind the decision: The decision to suspend the earnings part of the triple lock was made in response to concerns about the potential cost to public finances of maintaining the triple lock during a period of economic uncertainty caused by the pandemic. With earnings growth expected to be volatile in the coming years due to the impact of the pandemic on the labor market, the government argued that temporarily suspending this part of the triple lock would provide more stability for public finances.

Overall, while the decision to suspend the earnings part of the triple lock may be seen as a way to manage short-term fiscal pressures, it has been criticized by some as a “stealth tax raid” on pensioners, as it effectively reduces the rate of pension increases over the next four years compared to what would have been guaranteed under the triple lock.

If you have any questions, speak to the Robinsons Team.