Rachel Reeves shared some insights on what news the Budget might hold for pensioners
Ahead of the Budget on November 26, Rachel Reeves offered some comforting assurances to pensioners, but it may come at an unexpected cost. The Chancellor announced the state pension rate will receive an above-inflation increase of 4.8%, which will be confirmed in the Budget.
She also opted to highlight the government’s “commitment to the triple lock”, the mechanism that uprates state pension each year. Around 13 million pensioners are expected to benefit from the increase.
Reeves stated earlier this week: “Whether it’s our commitment to the triple lock or to rebuilding our NHS to cut waiting lists, we’re supporting pensioners to give them the security in retirement they deserve.
“At the Budget this week, I will set out how we will take the fair choices to deliver on the country’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living.”
Chancellor Rachel Reeves will be presenting the Budget on November 26(Image: GETTY)
Concerns about the future of the triple lock had been raised ahead of the Budget as experts criticised its unpredictable nature and exponential cost to the Treasury, with claims that it will become unsustainable in the near future.
Earlier this year, the Institute for Fiscal Studies released a report stating it would be “sensible” to move away from the triple lock and proposed a possible alternative, similar to the system currently in use in Australia, known as a ‘smooth earnings link’.
It claimed this would provide more stability and predictability for both the government and pensioners to count on.
The triple lock increases state pension each year in line with the highest of three figures:
- National wage increases
- Inflation
- 2.5%
The smooth earnings link would set a target for state pension at median full-time earnings so state pensioners should receive the median, not average, of what a full-time employee is receiving in the UK.
If the state pension falls below this target, it could then be increased in line with wage growth. And if inflation goes above the average earnings growth then the state pension sum would increase in line with inflation instead.
While Reeves’ announcement may put pensioners’ minds at ease for now, this increase will bring the full state pension amount even closer to the personal allowance threshold. Once it surpasses this, the DWP payments could become liable for income tax bills.
This increase, based on 4.8 per cent earnings growth, will bring the full new state pension to around £12,534 per year. In comparison, the current limit that people are allowed to earn each year without paying income tax is £12,570.
Confirmation that the triple lock will remain in place has now raised concerns about the impact of a possible extension to the personal allowance threshold freeze. This would ultimately see pensioners paying more income tax, potentially even on state pension alone.
The triple lock mechanism was introduced in 2011 and has been increasing how much state pension people receive each year since. Except for a temporary suspension following the pandemic.
