The new state pension in 2027 will exceed the personal pension (Image: Getty)
This morning the Office for National Statistics reported that total pay, including bonuses, rose 3.9% in the three months to July. This is important because it is one of three figures that the triple lock uses to determine the annual increase in the state pension. The other two are the September inflation rate and the 2.5% support level. For now, it looks like today’s wage numbers are the likely basis for a hike next April, unless inflation picks up.
Unfortunately, this 3.9% growth is below the market forecast of 4.1% that I reported on Sunday. This is bad news and I’m sorry to break it. The initial forecast turned out to be too optimistic, as wage growth in the private sector disappointed. So instead of rising by almost £515 a year, the full new state pension is likely to increase by £488.80 a year from today’s £12,547.60. This will take it above £13,000 for the first time in history – to £13,036.96 to be exact.
On a weekly basis, the full new state pension will rise from £241.30 to around £250.70 per week from April 2027, an increase of £9.40. How much people will receive in practice will depend on their National Insurance contributions. Older pensioners receiving the basic state pension will see a weekly increase from £184.90 to around £192.10 per week. That’s an extra £7.20 or £374.40 per year. Each year the full basic state pension will rise from today’s £9,614.80 to £9,989.20. This is more than £3,000 less than the new state pension for the reasons I explained yesterday.
Remember that the income figure is not necessarily the deciding factor. September inflation still matters. In July, inflation was 2.9%, but it is expected to rise. We will receive September numbers in mid-October. Oil has risen to about $108 a barrel, which could lead to higher inflation so retirees can earn more. Let’s see.
Then comes an alarming moment. With the full new state pension amounting to almost £13,037, it will exceed the frozen personal benefit of £12,570 for the first time in history. That’s £467 more to be exact. This means a basic rate taxpayer of 20% could pay HMRC £93.40 of their state pension.
It also means that even more pensioners will be brought into the tax system as the state pension rises while tax-free benefits remain the same.
HMRC estimates that 9.5 million people of pension age now pay income tax, up from 8.3 million just two years ago. The OBR estimates that a further 600,000 pensioners have been forced to pay tax solely due to frozen thresholds. This figure will rise to one million by 2030/31, when the freeze ends.
The State Pension has always been taxable by law, but until now the full new State Pension has remained below the personal allowance. The situation will change in April. For the first time, a person receiving the full new State Pension will have income above the tax-free threshold from the State Pension alone.
Former Chancellor Rachel Reeves came up with the Band-Aid idea. She promised that pensioners whose only income is a state pension would not have to pay the tax they would otherwise have to pay. But the government has still not explained exactly how this will work.
Basic government pension supplements such as Serps and S2P have always been taxable and this will not change. So only about 800,000 of the 13 million retirees will benefit from Reeves’ promise. Which also creates a terrible cliff edge.
If a pensioner has even a small amount of other income, be it a private pension, supplementary state pension, savings or other taxable income, they will not benefit from Reeves’ promise.
This is where the real tax nightmare begins. The personal allowance is frozen at £12,570 until 2031. The state pension will continue to rise under a triple lock. Thus, retirees will continue to receive higher pensions, while the amount they can receive tax-free will remain the same.
The Triple Lock may have brought another hefty pay rise, but it came with some nasty tax consequences for millions of retirees.